HOME and CDBG Guidebook

Foreword

One of the major priorities of the U.S. Department of Housing and Urban Development (HUD) is the creation of

affordable housing. The Department administers several Federal programs that assist state and local governments, as

well as nonprofits and other partners, to develop affordable homeownership and rental units for low-income

households. Two of the most important programs are the HOME Investment Partnerships Program (HOME) and the

Community Development Block Grant (CDBG) Program.

Both HOME and CDBG are important resources in the local development of homes and communities. While sharing

similar goals related to improving the living conditions of low-income families, each program differs in its eligible

activities and requirements. In addition, there is a tremendous need for affordable housing in many communities and

these needs often exceed available resources. So, it is important that state and local governments make strategic

decisions about how to spend their HOME and CDBG funds.

HUD’s Office of Affordable Housing Programs, in partnership with HUD’s Office of Block Grant Assistance,

developed this guidebook as a tool for community development practitioners to assist in making these strategic choices

about HOME and CDBG resources for affordable housing. Its purpose is to provide practical guidance on how both

HOME and CDBG requirements are interpreted and to provide examples of how the two funding sources might be

used in tandem. The Department encourages communities to seek strategic, effective, and innovative ways of using

two of its most important affordable housing resources – the HOME and CDBG Programs.

HOME and CDBG

Table of Contents

Introduction........................................................................................................................................................................................... 1

Making Effective Use of Program Resources ......................................................................................................................... 1

Selecting Suitable Activities............................................................................................................................................ 1

Complying with the Rules .............................................................................................................................................. 2

Leveraging CDBG and HOME .................................................................................................................................... 3

Planning for CDBG and HOME.............................................................................................................................................. 3

Assessment of Community Needs................................................................................................................................ 3

Community-Wide Plan.................................................................................................................................................... 3

Individual Project Plan.................................................................................................................................................... 4

How to Use this Model............................................................................................................................................................... 4

About the Model Program Guides ........................................................................................................................................... 5

Chapter 1: HOME and CDBG Basics .............................................................................................................................................6

What is HOME? .......................................................................................................................................................................... 6

HOME Program Partners .......................................................................................................................................................... 6

HOME Program Activities ........................................................................................................................................................ 7

Eligible Costs.................................................................................................................................................................... 7

Prohibited Activities and Costs ..................................................................................................................................... 8

HOME Program Requirements ................................................................................................................................................ 9

Income Eligibility and Verification ...............................................................................................................................9

Subsidy Limits ................................................................................................................................................................10

Affordability Periods .....................................................................................................................................................10

Maximum Value .............................................................................................................................................................10

Property Standards.........................................................................................................................................................11

HOME Administrative Requirements....................................................................................................................................11

Administrative and Planning Costs.............................................................................................................................11

Match ...............................................................................................................................................................................11

Commitment and Expenditure Deadlines .................................................................................................................12

Program Income ............................................................................................................................................................12

Pre-Award Costs ............................................................................................................................................................12

What is CDBG? .........................................................................................................................................................................13

CDBG Program Partners .........................................................................................................................................................13

CDBG Program Activities .......................................................................................................................................................14

Eligible CDBG Activities .............................................................................................................................................14

Ineligible CDBG Activities...........................................................................................................................................15

CDBG National Objectives .....................................................................................................................................................15

Benefit Low- and Moderate-Income Persons ...........................................................................................................16

Elimination of Slum and Blight ...................................................................................................................................17

Urgent Need ...................................................................................................................................................................17

CDBG Administrative Requirements and Caps ...................................................................................................................18

Administrative Cap ........................................................................................................................................................18

Low- and Moderate-Income Benefit Expenditures .................................................................................................18

Public Services Cap........................................................................................................................................................19

Program Income ............................................................................................................................................................19

Timely Use of Funds .....................................................................................................................................................20

Pre-Award Costs ............................................................................................................................................................20

HOME and CDBG

Chapter 2: Using HOME and CDBG for Rental Housing ........................................................................................................26

Approaches to Creating Rental Housing ...............................................................................................................................26

Acquisition ......................................................................................................................................................................26

Tenant-Based Rental Assistance..................................................................................................................................27

Rehabilitation..................................................................................................................................................................28

New Construction..........................................................................................................................................................28

Financing and Developing Rental Housing...........................................................................................................................29

Partners............................................................................................................................................................................30

Forms of Assistance ......................................................................................................................................................33

Eligible Projects..............................................................................................................................................................35

Assisted Units.................................................................................................................................................................36

Eligible Costs..................................................................................................................................................................37

Property and Neighborhood Standards .....................................................................................................................38

Other Federal Requirements........................................................................................................................................38

Ongoing Compliance ................................................................................................................................................................38

Affordability Period.......................................................................................................................................................38

Rent Requirements ........................................................................................................................................................39

Income Eligibility...........................................................................................................................................................40

Ongoing Property Quality ............................................................................................................................................41

Chapter 3: Using HOME and CDBG for Homeownership ......................................................................................................42

Approaches to Creating Homebuyer Units ...........................................................................................................................42

Development Approaches............................................................................................................................................42

Direct Homebuyer Subsidy Approach .......................................................................................................................43

Financing and Developing Homebuyer Housing.................................................................................................................46

Eligible Property Types.................................................................................................................................................49

Property Standards.........................................................................................................................................................50

Other Federal Requirements........................................................................................................................................50

Ongoing Requirements .............................................................................................................................................................50

Affordability Period.......................................................................................................................................................50

Recapture Option ..........................................................................................................................................................51

Resale Option .................................................................................................................................................................51

Enforcing Resale and Recapture Provisions..............................................................................................................53

Low-Income Targeting .................................................................................................................................................53

3-1: American Dream Downpayment Initiative (ADDI)—Side-By-Side Comparison of Downpayment Assistance

Requirements—By Source of Funds ......................................................................................................................................55

Chapter 4: Using HOME and CDBG for Homeowner Rehabilitation....................................................................................57

Approaches to Homeowner Rehabilitation...........................................................................................................................57

Minor Rehabilitation......................................................................................................................................................57

Moderate/Substantial Rehabilitation ..........................................................................................................................57

Reconstruction ...............................................................................................................................................................58

Historic Preservation.....................................................................................................................................................59

Lead-based Paint Hazard Evaluation and Reduction ..............................................................................................59

Code Enforcement ........................................................................................................................................................60

Home-based Business Rehabilitation .........................................................................................................................61

Financing and Undertaking Homeowner Rehabilitation.....................................................................................................61

Partners............................................................................................................................................................................61

Forms of Financial Assistance .....................................................................................................................................61

Eligible Costs..................................................................................................................................................................64

Property and Rehabilitation Standards .......................................................................................................................65

HOME and CDBG

Initial Owner Incomes ..................................................................................................................................................66

Other Federal Requirements........................................................................................................................................67

Chapter 5: Using HOME and CDBG for Comprehensive Neighborhood Revitalization ...................................................68

Approaches to Neighborhood Revitalization........................................................................................................................68

Planning Models for Urban Redevelopment.............................................................................................................68

Housing Assistance........................................................................................................................................................69

Property Inspections and Code Enforcement ..........................................................................................................69

Infrastructure Development and Improvement .......................................................................................................70

Economic Development...............................................................................................................................................70

Community Facilities and Public Services ................................................................................................................. 71

Financing and Requirements for Neighborhood Revitalization ........................................................................................71

Partners............................................................................................................................................................................71

Approaches to Financing..............................................................................................................................................72

Eligible Costs..................................................................................................................................................................74

Chapter 6: Making Strategic Investment Decisions ..................................................................................................................... 75

Step 1: Evaluate community needs and preferences...............................................................................................76

Step 2: Determine program types based upon needs and preferences ................................................................77

Step 3: State intended program outcomes ................................................................................................................78

Step 4: Evaluate the strengths of HOME and CDBG v. intended outcomes.................................................... 78

Step 5: Assess CDBG and HOME constraints .......................................................................................................80

Step 6: Determine whether program should be co-funded with HOME and CDBG...................................... 81

Step 7: If co-funded program, evaluate each project to determine appropriate uses of funds ........................82

Administering Programs ...........................................................................................................................................................83

Choosing Projects and Partners .................................................................................................................................. 83

Setting Up Adequate Financial Systems .................................................................................................................................85

Developing Efficient Reporting and Record Keeping Systems .........................................................................................86

Reviewing Program Performance and Compliance ............................................................................................................. 87

Endnotes ..............................................................................................................................................................................................90

iii

HOME and CDBG

Introduction

Two programs form the cornerstone of the U.S.

Department of Housing and Urban Development’s

(HUD’s) community development efforts—the

HOME Investment Partnerships Program and the

Community Development Block Grant (CDBG).

Across the country, HOME and CDBG funds are

helping communities develop new affordable housing

for both renters and homebuyers, rehabilitate existing

homes, and turn around troubled neighborhoods.

While HOME and CDBG share the same goals—the

growt

h and improvement of America’s communities—

the programs differ in important ways. For example,

HOME and CDBG have different eligible activities,

different approaches to meeting the needs of low- and

moderate-income families, and different rules regarding

matching funds.

By using HOME and CDBG funds strategically,

com

munities can optimize their use of both funding

sources, while working within the limitations and

regulations of both programs.

HOME and CDBG: Working Together to Create Affordable

Housing

is the community development professional’s

guide to using HOME and CDBG funds for affordable

housing activities as strategically as possible. This

model program guide begins by outlining how HOME

and CDBG work and by identifying critical differences

between the two programs. Next, the guide provides a

detailed consideration of how to use HOME and

CDBG to support rental housing, homeownership,

rehabilitation, and comprehensive neighborhood

revitalization projects, giving special attention to how

to coordinate the two funding sources. The guide

concludes with some final considerations for making

strategic investment decisions using HOME and

CDBG.

Throughout the guide, the discussion will focus on the

impo

rtance of using program resources effectively, and

how this can be done to meet local housing and

community development needs, and to stay in

compliance with Federal program rules.

Making Effective Use of

Program Resources

Community development is a broad term that

encompasses a wide range of activities, including

housing, economic development, health, employment

and educational services, infrastructure, and many other

activities designed to improve the welfare of

neighborhoods and families. In towns, counties, and

states across America, community development

remains a primary concern for local leaders, the staffs

of nonprofit and public agencies, and citizens alike.

Yet, Federal resources for community development are

limited and are not sufficient to

address all of the needs

in most jurisdictions. While HOME and CDBG can

play an important part in addressing community

development needs, they must be used wisely in order

to obtain the maximum benefit from each resource. It

is important that jurisdictions use these programs

strategically because:

• Some t

ypes of activities are better suited to be

undertaken under one program than the other;

• Whe

n combining these resources within projects, it

is important that the rules for each program be

followed; and

• Effective lev

eraging of CDBG and HOME

resources can mean a generating a greater “bang for

the buck” than when each program is used alone.

Selecting Suitable Activities

When Congress enacted the CDBG and HOME

Programs, it had differing objectives in mind. CDBG

was created to consolidate a number of previous

categorical grant programs that had addressed a range

of community needs, including water and sewer, urban

renewal, model cities, historic preservation, and

neighborhood development. CDBG’s eligible

HOME and CDBG

activities, therefore, are diverse and range from

residential rehabilitation to infrastructure to public

services. While it has a strong focus on meeting the

needs of low-income persons, it is also designed to be

flexible in order to address other concerns.

The HOME Program was created nearly two decades

later,

to address the growing affordable housing crisis

in America. Its purpose is to increase the supply of

affordable housing for low-and very low-income

households. There are four eligible activities under

HOME and all relate directly to affordable housing. In

addition, HOME has a secondary purpose of

supporting the development and sustainability of

nonprofit housing providers. To achieve this, it

mandates that a percentage of each annual allocation be

used by community housing development

organizations (CHDOs) to own, develop, or sponsor

housing.

Given these differing legislative histories and program

purp

oses, it is no wonder that each program has its

relative strengths and limitations. For example,

CDBG cannot generally be used to construct new

housing. However, it can be used to develop the

infrastructure in a low-income neighborhood that

might support a new affordable housing development.

HOME, on the other hand, can be a very good

resource for building new units but cannot be used to

create off-site infrastructure. So, making strategic

choices about how the HOME and CDBG programs

are used can help a jurisdiction address a wide range of

needs within its available resources.

In addition to these programmatic constraints, there are

also str

ategic elements in deciding which program to

use for which purpose.

Assume, for example, that the goal of a jurisdiction’s

progr

am is to improve and preserve its supply of

affordable homebuyer units. Both CDBG and HOME

can be used to assist with homeownership. However, only

HOME mandates that units remain affordable for a

specific period of time. HOME might be the preferred

resource to use in this situation.

Now assume a different a jurisdiction wishes to spur

neighborhoo

d revitalization by rehabilitating rental units.

Its objective is not necessarily to create long-term

affordability, but rather to address the blight in the area

so that other businesses and homeowners will locate in the

neighborhood. In this instance, both HOME and

CDBG can be used for rental rehabilitation. However,

CDBG

might be the preferred resource because it does not

mandate long-term affordability restrictions and allows for

undertaking projects where the focus is not necessarily on

addressing the needs of low- and moderate-income

households but rather on cleaning up a blighted

neighborhood.

Jurisdictions that are familiar with the rules and

flexibiliti

es of both HOME and CDBG will be able to

make strategic choices about investing their program

resources.

Complying with the Rules

In addition to thinking strategically about how and

when to use HOME and CDBG, jurisdictions need to

ensure that both sets of program rules are met. When

the programs are operated separately and are not

combined in projects, jurisdictions must make sure that

they carefully document compliance for each program

according to the rules established by the CDBG and

HOME regulations.

However, CDBG and HOME are sometimes

combined in a single project. When

this is done, the

jurisdiction must ensure that both sets of rules are met

simultaneously. Since both HOME and CDBG are

Federal programs with implementing statutes and

regulations, neither program overrules the other. In

other words, the most stringent applicable requirement

from each program must always be met.

For example, when a PJ invests HOME funds in a

multifamily rental project, it can elect to invest its

resources in selected HOME units. That is, if the

jurisdiction wishes to partially rehabilitate a 10-unit

rental building, it can fund two HOME units and

leverage other funds to rehabilitate the remaining eight

units. However, if CDBG is also invested in that same

10-unit project, the entire structure is considered to be

assisted. Therefore, if the housing national objective is

used it would mandate that at least 51 percent of the

units be occupied by low- and moderate-income

households, regardless of the amount of CDBG assistance

in the project. Under HOME rules, only the two

assisted units would need to be occupied by income-eligible

families, but CDBG mandates that low- or moderate-

income families occupy at least six units.

So, it is important for the jurisdiction to understand the

rules of b

oth programs in order to be sure that all

activities are compliant.

HOME and CDBG

Leveraging CDBG and HOME

Jurisdictions need to be familiar with how CDBG and

HOME work together so that they can get the greatest

impact for their investments. As noted above, there

are differing instances when either CDBG or HOME is

the most appropriate tool for a particular task at hand.

However, sometimes when those tools are used

together, the impact is greater than either could achieve

alone.

For example, assume that HOME funds are used to

support ho

meownership in a given neighborhood.

HOME or CDBG can provide downpayment assistance

to help low-income families to finance the purchase of new

homes in a targeted neighborhood. However, if the

families move into the neighborhood and find that the

community lacks community facilities and local retail

shops to meet their needs, it might make sense for the

jurisdiction to invest its CDBG funds in the non-housing

needs of the neighborhood, and its HOME funds in the

homeownership program. This way, it can stretch its

resources to undertake a broader range of activities to

meet the diverse needs of the neighborhood residents. This

results in a more vibrant, successful community.

It is important for jurisdicti

ons to consider how CDBG

and HOME can work together so that they are able to

get the greatest return for their programs.

Planning for CDBG and

HOME

There are numerous ways that CDBG and HOME can

be combined. Jurisdictions need to evaluate these

options and then make decisions about how to

effectively use these programs given the needs of their

community. The section below provides a brief

summary of how jurisdictions can consider these

options as a part of their planning processes. For

more detail on the key steps in making strategic

decisions regarding CDBG and HOME funding, see

Chapter 6 of this guidebook.

To tackle these complex program decisions,

jurisdictions

may wish to consider developing:

• An assessment of commu

nity needs;

• A community-wide plan for addressing needs

thr

ough an array of different community

development projects; and

• A clearl

y-defined approach to each individual

community development project.

Assessment of Community Needs

Although many American communities share similar

challenges, such as a lack of affordable housing, no two

communities are exactly alike. A needs assessment

helps each community identify and define its individual

needs as well as its strengths and assets.

The needs assessment should be co

nducted by the local

or state government and should be the first step in

determining how to effectively use HOME and CDBG

resources. Often this assessment is done as a part of

the Consolidated Planning process and includes:

• A descripti

on of the assets and resources present in

the community (such as a community college or

existing infrastructure);

• Curren

t data and projections concerning

demographics (e.g., households, income levels, etc.)

as well as housing supply and demand;

• Data on rents

and housing prices in specific

neighborhoods within the jurisdiction;

• An a

nalysis of the health of the local economy;

• An assessment of the state of the jurisdiction’s

infras

tructure;

• An a

nalysis of which neighborhoods have the most

acute community development needs; and

• A general revi

ew of the feasibility and need for

certain types of community development projects

(such as infill housing versus multifamily rental

housing) in specific neighborhoods.

Community-Wide Plan

After conducting a community needs assessment,

community development staff should develop a plan

for tackling the challenges faced by the community.

Typically, the plan will involve a number of different

community development activities in different

neighborhoods within the jurisdiction. The plan strives

to coordinate different types of housing, economic

development, infrastructure, and related activities to

maximize the impact of public funds.

States and localities can use the Co

nsolidated Planning

process—a requirement for direct grantees receiving

HOME or CDBG funds—as an opportunity to

undertake community-wide planning. Note that

HOME and CDBG

subrecipients and units of general local government

who receive funds from a direct HUD grantee do not

need to do their own consolidated plan. They are

covered by the grantee’s plan. This planning process

ensures that there is input from nonprofit partners,

local businesses, and most importantly, residents that

will be affected by community development projects.

Wide community participation in the planning process

is invaluable because it ensures that community

development projects truly reflect what the community

wants and needs.

When preparing the Consolidated Plan and Annual

Action Plan, jurisdictions determine the appropriate

level and nature of a variety of housing activities, such

as the development of local rental, homebuyer,

rehabilitation, special needs, or other types of

affordable housing programs to address community

needs. The process should also address how HOME

and CDBG can be used strategically to address the

needs identified for the community.

Individual Project Approach

With a consolidated plan in hand, jurisdictions are

ready to evaluate the feasibility, implementation and

benefits of program resources for each individual

project.

Feasibility Research. Often, communities will need

additional research to establish the feasibility of a given

project. For housing projects, a market study is a

focused assessment of whether a specific housing

product, on a specific site, will be able to attract

residents with the ability to pay—and how quickly.

This type of study will explicitly conclude whether the

proposed rents or housing prices for the specific

project are achievable. For neighborhood

revitalization projects, a broader market study that

examines both housing and economic data may be

necessary to assess the feasibility of a larger, multi-

faceted initiative.

Implementation Planning. As early as possible,

community development staff should identify the

potential costs and existing concerns related to the

implementation of the project. Even an apparently

straightforward housing development project can

involve a diverse array of costs: administrative

expenses, infrastructure modifications, services for

residents, basic construction costs, and more. As this

model will explain in detail, the availability of HOME

and CDBG funds (as well as other sources of financial

support) depends on whether the specific use of funds

qualifies as an eligible activity under their respective

program rules. Strategic use of program funds can

maximize the impact of subsidies while meeting the

eligibility requirements of all relevant programs.

Costs and Benefits of Funding Sources. Subsidies

from HOME and CDBG programs enable

communities to undertake projects that may not

otherwise be feasible. However, it is important to

consider the additional responsibilities and restrictions

that come with using these funds for particular

projects. Some possible responsibilities and restrictions

include, depending on the funding source:

• Rent limits for subsidized units;

• Restrictions on the purchase and resale of

subsidized homes;

• Rep

orting and monitoring responsibilities to ensure

ongoing compliance with program rules and

regulations; and

• Rules regarding the targeting of subsidies toward a

program’s intended beneficiaries.

Communities should consider carefully how the

requirements of different funding sources will impact a

given project.

How to Use this Model

This model program guide is intended for PJ staff to

help communities use their HOME and CDBG funds

strategically. The guide is designed to be a useful

“crash course” in the programs and it highlights the

differences that help practitioners invest these

resources wisely. Each chapter describes the applicable

program rules for each specific type of housing

development—rental housing, homeownership, and

rehabilitation—and includes a side-by-side comparison

of the key requirements of the HOME and CDBG

programs. This format should assist the community

development practitioner in need of specific

programmatic information for quick-reference.

This guide is organized in the following six chapters:

Chapter 1: HOME and CDBG Basics introduces

each program and provides general information on the

eligible activities, program restrictions, and

administrative requirements for each program. The

chapter includes a chart that summarizes the key

program requirements to facilitate comparison.

HOME and CDBG

Chapter 2: Using HOME and CDBG for Rental

Housing describes rental housing requirements and

illustrates how HOME and CDBG can be combined to

support the development of affordable rental housing.

Chapter 3: Using HOME and CDBG for

Homeownership Programs explores ways to assist

homebuyers and considers the most effective ways that

communities combine the two programs to develop

housing units for purchase.

Chapter 4: Using HOME and CDBG for

Homeowner Rehabilitation provides an analysis of

using HOME and CDBG for homeowner

rehabilitation.

Chapter 5: Using HOME and CDBG for

Comprehensive Neighborhood Revitalization

considers the use of HOME and CDBG funds for

targeted community development within a specific

neighborhood. Strategic use of HOME and CDBG

along with other resources can allow communities a

chance to breathe new life into a deteriorating

neighborhood.

Chapter 6: Making Strategic Investment

Decisions focuses on how communities can make the

most of every subsidy dollar. Careful allocation of

program funds, effective program design, and program

performance review are all part of an effective use of

HOME and CDBG.

Under the HOME Program, the recipient of HUD

funds is known as a “participating jurisdiction” or “PJ.”

Under the CDBG program, the recipient is known as a

“grantee.” Throughout this guidebook, the general

term “jurisdiction” will be used to mean the local or

HOME and CDBG

state government that receives HOME or CDBG

funds. When specifically referring solely to the

recipient of HOME funds, “PJ” will be used and when

specifically referring solely to the recipient of CDBG

funds, “grantee” will be used. Under the State CDBG

Program, units of general local government that receive

CDBG money from a state are sometimes known as

“state grant recipients”. Under this guide they will be

called units of general local government.

In addition, the guide uses the expression “low- and

moderate-income” or “LMI” to refer to income-eligible

persons or households under both HOME and CDBG.

This is because persons or households who are at or

below 80 percent of area median income, as

determined and adjusted by HUD on an annual basis,

are called “LMI” under the CDBG program, and “low-

income” under the HOME Program. When the guide

discusses the CDBG or HOME requirements of one of

the programs specifically, it uses the terminology of

that particular program.

About the Model Program

Guides

HOME and CDBG: Working Together to Create Affordable

Housing is one of a series of model program guides

published by the Office of Affordable Housing

Programs of the U.S. Department of Housing and

Urban Development. The model program guide series

provides technical assistance and guidance on HOME

Program implementation to participating jurisdictions.

Model program guides are available to the public at no

cost. For more information about the model program

guides, see the Office of Affordable Housing

Programs’ online library at

http://www.hud.gov/offices/cpd/affordablehousing/

library/modelguides/index.cfm.

Chapter 1:

HOME and CDBG Basics

This chapter is a basic primer for housing practitioners who are new to the HOME or CDBG programs. It provides a general

overview of the two programs, including their statutory intents and key program partners. For each program, the chapter describes

basic eligible activities and highlights important administrative requirements. The subsequent chapters provide more detail on each of

the eligible affordable housing activities. This chapter concludes with a detailed chart that compares the key requirements of the two

programs.

Part 1: HOME Investment

Partnerships (HOME)

Program

What is HOME?

Created by the National Affordable Housing Act of

1990 (NAHA), HOME is the largest Federal block

grant available to communities to create affordable

housing. The intent of the HOME Program is to:

• Increase the supply of decent, affordable housing to

low- and very low-i

ncome households;

• Expa

nd the capacity of nonprofit housing

providers;

•

Streng

then the ability of state and local

governments to provide housing; and

• Leverag

e private sector participation.

Every y

ar, the U.S. Department of Housing and

Urban Develo

pment (HUD) determines the amount of

HOME funds that states and local governments—also

known as Participating Jurisdictions (PJs)—are eligible

to receive using a formula designed to reflect relative

housing need. After money has been set aside for

America’s insular areas

and for nationwide HUD

technical assistance, the remaining funds are divided

between states (40 percent) and units of general local

government (60 percent).

The HOME Program regulations are found at 24 CFR

Part 92. The Final Rule was published on September

16, 1996 and was amended on March 30, 2004 to include

ADDI. The HOME regulations may be found on HUD’s

Office of Affordable Housing Programs website at:

http://www.hud.gov/offices/cpd/affordablehousing/

lawsandregs/regs/home/index.cfm

HOME Program Partners

To ensure success in providing affordable housing

opportunities, the HOME Program requires PJs to

establish new partnerships and maintain existing

partnerships. Partners play different roles at different

times, depending upon the project or activity being

undertaken with HOME funds. Key program partners

include:

• PJs. A PJ is any state, local government,

consortium that has been designated by HUD to

administer a HOME program.

¾ State governmen

ts: States are given broad discretion

in administering HOME funds. They may

allocate funds to units of local government

directly, evaluate and fund projects themselves,

or combine the two approaches. States may also

fund projects jointly with local PJs. They may

use HOME funds anywhere within the state,

including within the boundaries of local PJs.

¾ Local governm

ents and consortia: Units of general

local government, including cities, towns,

townships, and parishes, may receive PJ

designation or they may be allocated funds by

the state. Contiguous units of local government

may form a consortium for the purpose of

qualifying for a direct allocation of HOME

funds. The local government or consortium

then administers the funds for eligible HOME

uses.

• Community Housing Development

Organizations (CHDOs

). A CHDO is a private,

nonprofit organization that meets a series of

qualifications prescribed in the HOME regulations.

Each PJ must use a minimum of 15 percent of its

annual allocation for housing that is owned,

developed, or sponsored by CHDOs. PJs evaluate

HOME and CDBG

organizations’ qualifications and designate them as

CHDOs. CHDOs also may be involved in the

program as subrecipients, but the use of HOME

funds in this capacity is not counted towards the 15

percent set-aside.

• Subrecipients. A subrecipient is a public agency or

nonprofit organization selected by a PJ to

administer all or a portion of its HOME program.

It may or may not also qualify as a CHDO. A

public agency or nonprofit organization that

receives HOME funds solely as a developer or

owner of housing in not considered a subrecipient.

Other important partners in the HOME Program

include:

• Developers, owners and sponsors. Developers,

owners, and sponsors of housing developed with

HOME funds may be for-profit or nonprofit

entities. Developers are the entities responsible for

the putting the housing deal together. Owners are

the entities that hold title to the property after

rehabilitation, construction, or acquisition.

Sponsors work with other organizations—such as

other nonprofits—to assist them to develop and

own housing. At project completion, they turn over

title to the property to the other organization.

• Private lenders. Most HOME projects leverage or

involve other financing, from for-profit lenders or

other entities such as foundations or community

groups.

• Third-party contractors. There is a range of other

entities that might work on the HOME Program,

such as architects, planners, construction managers,

real estate agents, or consultants. These third-party

contractors are responsible for specific, well-defined

tasks that contribute to the PJ’s overall affordable

housing activity, such as consolidated planning.

HOME Program Activities

HOME funds can be used to support four general

affordable housing activities:

• Homeowner rehabilitation. HOME funds may be

used to assist existing owner-occupants with the

repair, rehabilitation, or reconstruction of their

homes.

• Homebuyer activities. PJs may finance the

acquisition and/or rehabilitation, or new

construction of homes for homebuyers.

• Rental housing. Affordable rental housing may be

acquired and/or rehabilitated, or constructed.

• Tenant-based rental assistance (TBRA).

Financial assistance for rent, security deposits and,

under certain conditions, utility deposits may be

provided to tenants. Assistance for utility deposits

may only be provided in conjunction with a TBRA

security deposit or monthly rental assistance

program.

Eligible Costs

Eligible costs under the HOME Program depend on

the nature of the program activity. Generally, HOME

funds can be used for the following activities:

• New construction. HOME funds may be used for

new construction of both rental and ownership

housing. Any project that includes the addition of

dwelling units outside the existing walls of a

structure is considered new construction.

• Rehabilitation. This includes the alteration,

improvement, or modification of an existing

structure. It also includes moving an existing

structure to a foundation constructed with HOME

funds. Rehabilitation may include adding rooms

outside the existing walls of a structure, but adding a

housing unit is considered new construction.

• Reconstruction. This refers to rebuilding a

structure on the same lot where housing is standing

at the time of project commitment. HOME funds

may be used to build a new foundation or repair an

existing foundation. Reconstruction also includes

replacing a substandard manufactured house with a

new manufactured house. During reconstruction,

the number of rooms per unit may change, but the

number of units may not.

• Conversion. Conversion of an existing structure

from another use to affordable residential housing is

usually classified as rehabilitation. If conversion

involves additional units beyond the walls of an

existing structure, the entire project is new

construction. Conversion of a structure to

commercial use is not eligible under HOME.

• Site improvements. Site improvements must be in

keeping with improvements to surrounding

HOME and CDBG

standard projects. They include new, on-site

improvements where none are present or the repair

of existing infrastructure when it is essential to the

development. Building new, off-site utility

connections to an adjacent street is also eligible.

Otherwise, off-site infrastructure is not eligible as a

HOME expense, but may be eligible for match

credit.

• Acquisit

ion of property. Acquisition of existing

standard property, or substandard property in need

of rehabilitation, is eligible as part of either a

homebuyer program or a rental housing project.

After acquisition, rental units must meet HOME

rental occupancy, affordability, and lease

requirements.

• Acquisition

of vacant land. HOME funds may be

used for acquisition of vacant land only if

construction will begin on a HOME project within

12 months of purchase. Land banking is

prohibited.

• Demolition. Demolition of an existing structure

may be funded through HOME only if construction

will begin on the HOME project within 12 months.

• Relocation costs. The Un

iform Relocation

Assistance and Real Property Acquisition Policies

Act of 1970 (known as the “Uniform Relocation

Act” or “URA”) and Section 104(d) of the Housing

and Community Development Act of 1974, as

amended (known as “Section 104(d)”) apply to

HOME-assisted properties. Both permanent and

temporary relocation assistance are eligible costs,

for all those relocated, regardless of income. Staff

and overhead costs associated with relocation

assistance are also eligible. Note that

homeownership undertaken with FY04 –FY07

American Dream Downpayment Initiative (ADDI)

funds is not subject to the URA.

• Refinanc

ing. HOME funds may be used to

refinance existing debt on single family, owner-

occupied properties in connection with HOME-

funded rehabilitation. The refinancing must be

necessary to reduce the owner’s overall housing

costs and make the housing more affordable.

Refinancing for the purpose of taking out equity is

not permitted. HOME may be used to refinance

existing debt on multifamily projects being

rehabilitated with HOME funds, if refinancing is

necessary to permit or continue long-term

affordability, and is consistent with PJ-established

refinancing guidelines, as outlined in the PJ’s

consolidated plan.

• Capitalization of project reserves. HOME funds

may

be used to fund an operating deficit reserve for

rental new construction and rehabilitation projects

for the initial rent-up period. The reserve may be

used to pay for project operating expenses,

scheduled payments to a replacement reserve, and

debt service for a period of up to 18 months.

• Project-related soft costs.

These must be

reasonable and necessary. Examples of eligible

project soft costs include:

¾ Fina

nce-related costs;

Architectural, engineering, and related

professional services;

Tenant and homebuyer counseling, provided the

recipient of counseling ultimately becomes the

tenant or owner of a HOME-assisted unit;

Projec

t audit costs;

Affirmative marketi

ng and fair housing services

to prospective tenants or owners of an assisted

project; and

PJ staff c

osts directly related to projects (not

including TBRA).

Prohibited Activities and Costs

HOME funds may not be used to support the

following activities and costs:

• Project reserve accounts.

HOME funds may not

be used to provide project reserve accounts (except

for initial operating deficit reserves) or to pay for

operating subsidies.

• Tenant-based rental assistance for certain

purposes. H

OME funds may not be used for

certain mandated existing Housing Choice Voucher

Program (formerly known as Section 8) uses, such

as Housing Choice Voucher rent subsidies for

troubled HUD-insured projects.

• Match for other Federal progra

ms. HOME

Program funds may not be used as the “nonfederal”

match for other Federal programs except to match

McKinney Act funds.

HOME and CDBG

• Development, operations, or modernization of

public housing:

¾ HOME funds cannot be used alone or in

conjunction with HUD-funded public housing

program funds (e.g., Public Housing capital

programs such as Development, Comprehensive

Improvements Assistance Program (CIAP) or

Comprehensive Grant Program (CGP)) to

acquire, rehabilitate, or construct public housing

units.

¾ HOME funds cannot be used to operate public

housing units under any circumstances.

• Properties receiving assistance under 24 CFR

Part 248 (Prepayment of Low-Income Housing

Mortgages). Properties receiving assistance

through the Low-Income Housing Preservation and

Resident Homeownership Act (LIHPRHA) or the

Emergency Low-Income Preservation Act

(ELIHPA) are not eligible for HOME assistance

except if the HOME assistance is provided to

priority purchasers. Note: these programs are no

longer funded by HUD.

• Double-d

ipping. During the first year after

project completion, the PJ may commit additional

funds to a project. After the first year, no additional

HOME funds may be provided to a HOME-

assisted project during the relevant period of

affordability, except that:

Tenant based rental assistance to families may be

renewed.

Tenant based rental assistance may be provided

to families that will occupy housing previously

assisted with HOME funds.

A homebuyer

may be assisted with HOME

funds to acquire a unit that was previously

assisted with HOME funds.

• Acquisit

ion of PJ-owned property. A PJ may not

use HOME Program funds to reimburse itself for

property in its inventory or property purchased for

another purpose. However, in anticipation of a

HOME project, a PJ may use HOME funds to:

Acquire property; and

Reimburse itself for property acquired with

other funds, specifically for a HOME project.

• Project-ba

sed rental assistance. HOME funds

may not be used for rental assistance if receipt of

funds is tied to occupancy in a particular project.

Funds from another source, such as Housing

Choice Voucher, may be used for this type of

project-based assistance in a HOME-assisted unit.

Further, HOME funds may be used for other

eligible costs, such as rehabilitation, in units

receiving project-based assistance from another

source—for example, Housing Choice Voucher or

state-funded project-based assistance.

• Pay for delin

quent taxes, fees, or charges.

HOME funds may not be used to pay delinquent

taxes, fees, or charges on properties to be assisted

with HOME funds.

HOME Program

Requirements

The HOME Program is designed to provide affordable

housing to low-income and very low-income families

and individuals. Therefore, the program has some key

restrictions that are designed to foster HUD’s

commitment to long-term affordable housing, quality

units and reasonable costs. These key restrictions are

discussed below.

Income Eligibility and Verification

Beneficiaries of HOME funds—homebuyers,

homeowners or tenants—must be low-income or very

low-income. “Low-income” is defined as an annual

income that does not exceed 80 percent of area median

income, as adjusted by household size. “Very low-

income” is defined as having an annual income that

does not exceed 50 percent of area median income, as

adjusted by household size. A household’s income

eligibility is determined based on its annual income.

Annual income is the gross amount of income

anticipated by all adults in the household during the 12

months following the effective date of the

determination. To calculate annual income, the PJ may

choose among three definitions of income:

• Section 8 annual (gross)

income. Annual income

determinations are based on the Part 5 definition of

annual income. Note that this definition is now

known as Part 5.

HOME and CDBG

• IRS adjusted gross income. The calculation for

“adjusted gross income” outlined in the Federal

income tax IRS Form 1040.

• Census long form annual income. Annual

income is defined as annual income used for the

Census long form, for the most recent decennial

Census.

Having the flexibility to choose the definition of

income facilitates the combination of HOME with

other funds, from sources that use differing definitions

of income. The PJ’s choice of definition may depend

on the other sources of funds in a project. For

example:

• The Community Development Block Grant

(CDBG) Program allows the same three definitions

of income; therefore, projects with both sources

should use the same definition.

• The Low Income Housing Tax Credit (LIHTC)

Program requires the use of the Part 5 definition of

income; therefore, projects that use both HOME

and LIHTCs can use the Part 5 definition and

comply with the requirements of both programs.

Subsidy Limits

HOME establishes minimum and maximum amounts

of HOME funds that may be invested in any project.

The minimum amount of HOME funds is $1,000

multiplied by the number of HOME-assisted units in

the project. The minimum

only

relates to the HOME

funds, and

not

to any other funds that might be used

for project costs. The minimum HOME investment

does not apply to TBRA.

The maximum per-unit HOME subsidy limit varies by

PJ. HUD determines the maximum amounts, which

are based on the PJ’s Section 221(d)(3) program limits

for the metropolitan area, each year. As above, those

limits apply only to HOME funds and not other funds

that may be invested in the project. These limits are

available from the HUD Field Office, or information

can be found online at

http://www.hud.gov/offices/cpd/affordableho

using/programs/

home/limits/subsidylimits.cfm.

The maximum per-unit subsidy limit is:

• 100 percent

of the dollar limits for a Section

221(d)(3) nonprofit sponsor, elevator-type

development, indexed for base city high cost areas,

and adjusted for the number of bedrooms.

• For some PJs, the 221(d)(3

) limit has already been

increased to 210 percent of the base limit. For

these PJs, HUD will allow, upon request, an

increase in the per-unit subsidy amount on a

program-wide basis. However, the absolute

maximum subsidy limit that HUD will allow is 240

percent of the base 221(d)(3) limits.

Affordability Periods

To ensure that HOME investments yield affordable

housing over the long term, HOME imposes rent and

occupancy requirements over the length of an

affordability period. For homebuyer and rental

projects, the length of the affordability period depends

on the amount of HOME assistance to the project or

buyer, and the nature of the activity funded. Table 1-1

provides the affordability periods.

Table 1-1: Determining the HOME

Period of Affordabil

ity

HOME Assistance per

Unit or

Buyer

Length of the

Affordability Period

Less than $15,000 5 years

$15,000 - $40,000 10 years

More than $40,000 15 years

New construction of rental

housing

20 years

Refinancing of rental

housing

15 years

Throughout the affordability period, income-eligible

households must occupy the HOME-assisted housing.

• Rental housing. When units become vacant

during the affordability period, subsequent tenants

must be income eligible and must be charged the

applicable HOME rent.

• Homebuyer assistance. If a home purchased with

HOME assistance is sold during the affordability

period, resale or recapture provisions apply to

ensure the continued provision of affordable

homeownership.

Maximum Value

HOME investments are for modest housing. Thus,

HOME imposes maximum value limits on owner

occupied and homebuyer units. The maximum

purchase price may not exceed 95 percent of the

median purchase price of homes purchased in the area.

In the case of a purchase-rehabilitation project, the

HOME and CDBG

value of the property after rehabilitation may not

exceed 95 percent of the area median purchase price

for that type of housing. The after-rehabilitation value

estimate should be completed prior to investment of

HOME funds.

There are two options that PJs have for determining

the 95 percent of the median purchase price. Most PJs

opt to use the FHA Section 203(b) Mortgage Limits.

These limits are available online at

http://www.hud.gov/offices/cpd/affordablehousing/programs/

home/limits/maxprice.cfm.

PJs also have the option of conducting a specialized

market analysis that meets certain requirements

established by HUD. (These can be found in the

HOME Final Rule at 24 CFR 92.254 (a)(2)(iii).)

Property Standards

HOME-funded properties must meet certain minimum

property standards.

• State and local standards. State and local codes

and ordinances apply to any HOME-funded project

regardless of whether the project involves

acquisition, rehabilitation, or new construction.

• Model codes. For rehabilitation or new

construction projects where there are not state or

local building codes, the PJ must use one of three

national model codes.

• Housing quality standards. For acquisition-only

projects, if there are no state or local codes or

standards, the PJ must enforce Housing Choice

Voucher Housing Quality Standards (previously

Section 8 HQS).

• Rehabilitation standards. Each PJ must develop

written rehabilitation standards to apply to all

HOME-funded rehabilitation work. These

standards are similar to work specifications, and

generally describe the methods and materials to be

used when performing rehabilitation activities.

HOME Administrative

Requirements

Administrative and Planning Costs

Each PJ may use up to 10 percent of each year’s

HOME allocation for reasonable administrative and

planning costs. In addition, up to 10 percent of

program income deposited in a PJ’s local HOME

account during a program year may be used for

administrative and planning costs. PJs, state recipients

and subrecipients may incur administrative and

planning costs.

Eligible administrative and planning costs include

expenditures for salaries, wages, and related costs of PJ

staff persons responsible for HOME Program

administration. In addition to staff salaries and related

costs, other planning and administrative costs could

include:

• Goods and services necessary for administration

(for example, utilities, office supplies, etc.);

• Administrative services under third party

agreements (for example, legal services);

• Administering a tenant-based rental assistance

(TBRA) program;

• Providing public information;

• Fair housing activities;

• Indirect costs under a cost allocation plan prepared

in accordance with applicable Office of

Management and Budget (OMB) Circular

requirements;

• Preparation of the Consolidated Plan; and

• Complying with other Federal requirements.

Match

The HOME Program requires that PJs contribute an

amount equal to no less than 25 percent of the total

HOME funds drawn down for project costs as a

permanent contribution to affordable housing. PJs

incur a match obligation only for project funds, not for

HOME and CDBG

administrative, operating, or capacity building

expenditures. Although the obligation is incurred

based on per dollar expended in project, match credit

can be invested in any HOME-eligible project, whether

the project receives HOME funds or not. Match can

be contributed in many different forms, including cash;

value of waived taxes or fees; value of donated land or

property; donated goods, services, materials or

equipment.

Commitment and Expenditure

Deadlines

The HOME Program encourages PJs to expend their

affordable housing funds expeditiously by imposing

two deadlines. HOME funds for a given program year

must be committed to a HOME project within two

years of signing the HOME Investment Partnerships

Agreement. For the CHDO set-aside funds, PJs must

reserve funds for use by CHDOs within that 24-month

period. In addition, HOME funds must be expended

within five years of receipt of funds. The Integrated

Disbursement and Information System (IDIS) tracks

each PJ’s progress toward meeting these deadlines.

Failure to meet these deadlines may result in a return of

HOME funds to HUD.

Program Income

Program income is the income received by a PJ, state

recipient, or subrecipient directly generated from the

use of HOME funds or matching contributions.

Program income must follow all of the HOME rules

and must be used before drawing down new HOME

funds. Program income includes, but is not limited to:

• Proceeds from the sale or long-term lease of real

property acquired, rehabilitated, or constructed with

HOME funds or matching contributions;

• Income from the use or rental of real property

owned by a PJ, state recipient or subrecipient that

was acquired, rehabilitated, or constructed with

HOME funds or matching contributions, minus the

costs incidental to generating that income;

• Payments of principal and interest on loans made

with HOME or matching funds, and proceeds from

the sale of loans or obligations secured by loans

made with HOME or matching contributions;

• Interest on program income; and

• Any other interest or return on the investment of

HOME and matching funds.

All HOME program income must be used in

accordance with the HOME Program rules. Where

program income is concerned, there is an important

distinction between subrecipients/state recipients and

CHDOs. Specifically:

• Program income received by subrecipients or state

recipients, such as rental income, repayment of

loans, interest on loans, fees, and payments for

services, is considered program income subject to

HOME regulations.

• However, project proceeds received and retained by

CHDOs are not considered program income. PJs

have the option of permitting project proceeds to

be retained by CHDOs or they may require

CHDOs to return these proceeds to the PJ. If the

project proceeds are returned to the PJ, they are

program income. Use of funds must be specified in

the CHDO written agreement and limited to either

HOME-eligible activities or other housing activities

that benefit low-income families.

Pre-Award Costs

PJs may incur eligible costs prior to the effective date

of their annual HOME Investment Partnerships

Agreement, subject to certain conditions. Both

administrative and project costs may be incurred. Only

costs eligible under the HOME Program rules in effect

at the time the costs are incurred are included.

Expenditures must meet all regulatory requirements,

including environmental review regulations.

Pre-award project costs may not exceed 25 percent of

the current HOME grant without written approval

from HUD. PJs may authorize subrecipients and state

recipients to incur pre-award costs, but authorization

must be in writing. Citizen participation and all other

applicable HOME requirements must be met.

HOME and CDBG

Part 2: Community

Development Block Grant

(CDBG Program)

What is CDBG?

Authorized under Title I of the Housing and

Community Development Act of 1974 (HCDA), as

amended, the Community Development Block Grant

(CDBG) is an annual grant to localities and states to

assist in the development of viable communities.

These viable communities are achieved by providing

the following, principally for persons of low- and

moderate-income:

• Decent housing;

• A suitable living environment; and

• Expanded economic opportunities.

“Principally” means that, at a minimum, 70 percent of

the CDBG funds expended by a state or entitlement

grantee should be used to benefit low- and moderate-

income people. This 70 percent can be measured over

the course of a one-, two- or three-year time period,

selected by the grantee.

Every year, each city in a metropolitan area with at least

50,000 people, principal cities (designated by OMB) of

metropolitan areas, and each county with more than

200,000 in population (excluding metropolitan cities

therein) receive CDBG funds. These cities and urban

counties are called “entitlement grantees”—they are

entitled to CDBG by virtue of their size. Each state

also receives a CDBG grant. The CDBG grant

amounts are determined by the higher of two formulas:

• U.S. Census data based on overcrowded housing,

population, and poverty; or

• U.S. Census data based on age of housing,

population growth lag, and poverty.

Entitlement communities receive the largest portion of

CDBG funding (70 percent) and states receive the

other 30 percent. Each state receives CDBG to pass

along to its smaller towns and rural counties (non-

entitlement communities), which usually compete with

one another for the funds. Every state has its own

procedures for operating the CDBG Program.

The CDBG regulations can be found at 24 CFR Part

570. Information about the Entitlement Program and

its regulations are found at:

http://www.hud.gov/offices/cpd/

communitydevelopment/

programs/entitlement/index.cfm

Under the State CDBG Program, states follow the

HCDA as supplemented by the State CDBG

regulations, as applicable. In exercising its obligation to

review a state’s performance under the program, HUD

gives maximum feasible deference to the state’s

interpretation of these statutory and regulatory

requirements. HUD will accept the state’s

interpretations, provided these are not clearly

inconsistent with the Act or the regulation.

Information about the State CDBG Program and its

regulations can be found at the following website:

http://www.hud.gov/offices/cpd/

communitydevelopment/

programs/stateadmin/index.cfm

CDBG Program Partners

The CDBG Program relies primarily on several key

partners to plan and implement eligible program

activities. These partners include:

• CDBG Grantee. In the Entitlement Program, local

governments are known as grantees. In the State

CDBG Program, the state is the grantee.

• Unit of General Local Government (UGLG). In

the State CDBG program, a unit of general local

government is the community funded by the state

to undertake CDBG activities. It is always a local

government such as a town, county, or village. In

the State CDBG Program, these are often referred

to as state grant recipients.

• Subrecipient. A subrecipient is a nonprofit or

public entity that assists the grantee to implement

and administer all or part of its CDBG Program.

Subrecipients are generally public or private

nonprofit organizations that assist the grantee to

undertake a series of activities, such as

administering a home rehabilitation loan pool.

Public agencies that are not a part of the grantee’s

legal government entity can also be subrecipients,

such as a water and sewer authority.

• Community-Based Development Organization

(CBDO). CBDOs are organizations that undertake

HOME and CDBG

CDBG-funded activities as part of a neighborhood

revitalization, energy conservation, or community

economic development project. CBDOs can be

nonprofit or some for-profit organizations, but

cannot be government entities. Note that the State

CDBG Program has a somewhat more broad

definition of the organizations that may qualify to

do these activities and it generally calls these

organizations “nonprofit development

organizations working under Section 105(a)(15) of

the statute”. This guide will generally call these

types of organizations CBDOs but states are

encouraged to review the Guide to National Objectives

and Eligible Activities for State CDBG Programs for

additional information. This guide is available on

the HUD website at

http://www.HUD.gov/offices/cpd/communitydevelopment/

librar

y/stateguide/index.cfm.

• Contractor.

A contractor i

s an entity paid with

CDBG funds in return for a specific service (for

example, construction). Contractors must be

selected through a competitive procurement

process.

CDBG Program Activities

There is a wide range of more than twenty activities

that are eligible under the CDBG Program. Grantees

are free to select those activities that best meet the

needs of their communities. However, in order to

ensure that the primary objective of the CDBG

Program is met—the benefit to low- and moderate-

income persons—grantees must ensure that all

activities meet a national objective. It is important for

grantees to remember that activities must meet this

“two-prong test”—activities must be both eligible and

meet a national objective.

Described below are the types of eligible and ineligible

CDBG activities. These ac

tivities have been very

loosely grouped into general categories since this

guidebook focuses specifically on eligible and ineligible

housing-related activities.

Eligible CDBG Activities

This section lists basic eligible activities under the

CDBG Program. Generally, CDBG funds can be used

for the following types of activities:

• Activities related to housing, including

but not

limited to:

¾ Homeownership assistance;

¾ Rental rehabilitation activities;

¾ Homeowner rehabilitation activities;

Housing services in connection with the HOME

Program; and

Lead-based paint testing and abatement.

• Other real property activities such as:

¾ Acquisition;

¾ Disposition;

¾ Clearance and demolition;

¾ Code enforcement; and

Historic preservation.

• Public facilities, including infrastructure, special

needs facilities, or community facilities.

• Activ

ities related to economic development,

including microenterprise assistance, commercial

rehabilitation, and special economic development

activities.

• Activities related to public services, including but

not limited to:

¾ Job training and employment services;

¾ Health care and substance abuse services;

¾ Child care;

¾ Crime preve

ntion; and

Fair housing counseling.

• Assistance to CBDOs—CDBG grantees may

provide grants or loans to CBDOs to carry out

CDBG-assisted activities as part of the following

types of projects:

¾ Neighborhood revitalization;

¾ Community economic development; and

¾ Energy conservation.

• Other Types of Activities—Certain other types of

activities are also eligible under CDBG, including:

¾ Payment of non-Federal share of Federal grant-

in-aid programs for activities that are CDBG-

eligible activities;

¾ Relocation assistance;

HOME and CDBG

¾ Loss of rental income (related to relocation);

Technical assistance to public or private

nonprofit entities to increase the capacity of

such entities to carry out eligible neighborhood

revitalization, or economic development

activities; and

¾ Assistance to institutions of higher education

with the capacity to carry out CDBG-eligible

activities.

Ineligible CDBG Activities

In general, any activity that is not specifically

authorized under the CDBG regulations and statute is

ineligible. In addition, the regulations stipulate that the

following activities may not be assisted with CDBG

funds:

•• Buildings for Buildings for tthhe gee generneraal col conduct of gnduct of goovevernmernment nt

(e.g., ci(e.g., city ty hall);hall);

•• GenGeneeral gral gooververnnmement exnt expepensnses; and es; and

•• PoliticPolitical aal acctivitivities. ties.

ThThe folle followingowing activiti activities maes mayy not not be assistbe assisteedd with with

CDBG funds CDBG funds unless authorizedunless authorized as a spe as a specciiaal ecl econonomic omic

developdevelopmemennt t activiactivity or ty or whwhen cen caarried outrried out by a C by a CBBDDOO: :

•• PurchasPurchasee of c of constonstructiruction eon equipmenquipment or ft or fuurnishings rnishings

and peand persorsonnal al proproppererty; ty;

•

Operating and maintenance expenses (of public

faciliti

es, improvements, and services), except for

operating and maintenance expenses associated with

public service activities, interim assistance, and

office space for program staff employed in carrying

out the CDBG Program;

• Operating and maintenance expenses (of public

facilities, improvements, and services), except for

operating and maintenance expenses associated with

public service activities, interim assistance, and

office space for program staff employed in carrying

out the CDBG Program;

•

New housing constructi

on, except under certain

conditions or when carried out by a CBDO; and

• New housing construction, except under certain

conditions or when carried out by a CBDO; and

•

Income paym

ents. • Income payments.

CDBG National Objectives CDBG National Objectives

BG grantees are responsible for ensuring that each

eligible activit

y meets one of three national objectives:

CDBG grantees are responsible for ensuring that each

eligible activity meets one of three national objectives:

• Benefit low- and moderate-income persons; • Benefit low- and moderate-income persons;

•

Aid in the prev

ention or elimination of slums or

blight; and

• Aid in the prevention or elimination of slums or

blight; and

•

Meet a need having a particular urgency (referred to

as urgent

need) that the grantee is unable to finance

on its own.

• Meet a need having a particular urgency (referred to

as urgent need) that the grantee is unable to finance

on its own.

Grantees must be able

to show that every CDBG-

funded activity

fits into one of these categories. The

chart below graphically demonstrates the CDBG

national objectives.

Grantees must be able to show that every CDBG-

funded activity fits into one of these categories. The

chart below graphically demonstrates the CDBG

national objectives.

NATIONAL OBJECTIVES

LOW/MOD SLUM/BLIGHT

URGENT

NEED

Area

Benefit

Limited

Clientele

Housing

Jobs

Area

Basis

Spot

Basis

Urban

Renewal

HOME and CDBG

Benefit Low- and Moderate-Income

Persons

Under this national objective, CDBG-assisted activities

must benefit low- and moderate-income persons using

one of the following categories:

• Area benefit activities;

•

Limited client

ele activities;

• Housing ac

tivities; or

• Job creation or retention activities.

A moder

ate-income person is one whose gross annual

income is at or below 80 percent of

the area median

income, as determined by HUD. A low-income person

is one whose income is at or below 50 percent of the

area median income.

Area Benefit. Area benefit is the most commonly

used categ

ory for community-wide activities. To

qualify under area benefit, an activity must benefit all

residents in a particular area (i.e., the service area)

where at least 51 percent of the residents are low- and

moderate-income persons. The service area must be

primarily residential and the activity must meet the

identified needs of low- and moderate-income persons.

Street improvements, water and sewer lines,

neighborhood facilities, and façade improvements in a

commercial district that serves a low- and moderate-

income neighborhood are all examples of activities that

have an area benefit.

Limited Clientele. Limited clientele activities benefit

a limited number of people and are eligible, as long as

at least 51 percent of those served are low- and

moderate-income persons. The grantee must do one

of the following to demonstrate a benefit to a limited

clientele:

• Be designed to exclusively serve one or more

groups of clientele that are presumed to be

principally low- and moderate-income:

¾ Abused children;

¾ Battered spouses;

¾ Elderly persons;

¾ Adults meeti

ng the U.S. Census definition of

severely disabled;

Homeless persons;

¾ Illiterate adults;

¾ Persons living with AIDS; and

¾ Migrant farm workers.

• Require documentation on household size and

income in order to show that at least 51 percent of

the clientele are low- and moderate-income.

• Have income eligibility requirements limiting the

activity to low- and moderate-income persons only.

• Provide t

he benefit that is of such a nature and in

such a location that it can be concluded that clients

are primarily low- and moderate-income.

In addition, the following activities may qualify under

the limited clientele national objective:

• Rem

oval of architectural barriers to mobility for

elderly persons or severely disabled adults;

• Microenterprise activities carried out in accordance

with the HUD regulations when the person owning

or developing the microenterprise is low- or

moderate-income; or

• Activities that provide training and other

employment support services when the percentage

of persons assisted is less than 51 percent low- and

moderate-income:

¾ If the proportion of total cost borne by CDBG

is no greater than the proportion of low- and

moderate-income persons assisted; and

¾ When the service assists businesses, CDBG is

only used in the project to pay for the job

training and/or supportive services.

Examples of limited clientele activities include

construction of a senior center; public services for the

homeless; meals on wheels for the elderly; and

construction of job training facilities for the disabled.

Housing Activities. This is an eligible activity

undertaken for the purpose of providing or improving

permanent residential structures that, upon completion,

will be occupied by low- and moderate-income

households. Structures with one unit must be occupied

by a low- and moderate-income household. Two-unit

structures must have at least one unit occupied by a

low- and moderate-income household. In structures

with three or more units, low- and moderate-income

households must occupy at least 51 percent of the

units.

HOME and CDBG

Under the following limited circumstances, structures

with less than 51 percent low- and moderate-income

households may be assisted:

• Assistance is for an eligible activity that reduces the

develop

ment cost of new construction of non-

elderly, multifamily rental housing project; and

• At least 20 percent of the units will be occupied by

low- a

nd moderate-income households at an

affordable rent; and

• The proportion of cost borne by CDBG funds is no

great

er than the proportion to be occupied by low-

and moderate-income households.

Examples of housing activities include acquisition;

downpa

yment assistance to a homebuyer; and

assistance to owners to rehabilitate their homes. Note

that housing assistance activities (such as rehabilitation

or homebuyer assistance) may not be categorized under

any other low- and moderate-income national objective

other than the housing national objective. Thus,

housing activities cannot be documented under the

Area Benefit, Limited Clientele or Job

Creation/Retention national objectives.

Job Creation or Retention Activities. These are

eligible activi

ties designed to create or retain permanent

jobs, at least 51 percent of which (computed on a full-

time equivalent basis) will be made available to, or held

by, low- and moderate-income persons.

Potentially eligible activities include construction by the

grantee

of a business incubator; loans to pay for the

expansion of a plant or factory; and assistance to a

business to prevent closure and a resultant loss of jobs

for low- and moderate-income persons.

Elimination of Slum and Blight

These are activities that help to prevent or eliminate

slums and blighted conditions. The activities must

meet the criteria of one of the three following

categories:

• Prevent or eli

minate slums and blight on an area

basis;

• Prevent or eli

minate slum and blight on a spot basis;

• Be in

an urban renewal area (entitlements only).

Area Slum/

Blight. Th

ese activities aid in the

prevention or elimination of slums or blight in a

designated area. Specifically:

• The delinea

ted area in which the activity occurs

must meet a definition of a slum, blighted,

deteriorated, or deteriorating area under state or

local law;

• In addition

, there must be a substantial number of

deteriorated or deteriorating buildings or public

improvements in the area, and the activity must

address one or more of the conditions that

contributed to the deterioration of the area; and

• Documentation must be maintained by the grantee

on the boundaries of the area and the conditions

that qualified the area at the time of its designation.

Examples of area slum/blight activities might include

assistance to c

ommercial or industrial businesses,

housing rehabilitation for non low and moderate

income persons, public facilities or improvements, and

code enforcement when these activities are conducted

in a blighted area.

Spot Slum/Blight.

These are activities that eliminate

specific conditions of blight or physical decay on a spot

basis not located in a designated slum or blighted area.

In addition:

•

Only acquisition, clearance, relocation, historic

preservation, and building rehabilitation activities

qualify for this national objective; and

• Rehabilitation is limited to the extent necessary to

eliminate specific conditions detrimental to public

health and safety.

Examples of spot basis include elimination of faulty

wiring, falling plaster or other similar conditions that

are detrimental to all potential occupants; historic

preservation of a public facility; and demolition of a

vacant, deteriorated building.

Urban Renewal Area. These are activities located

within an Urban Renewal project area or

Neighborhood Development Program action area that

are necessary to complete an Urban Renewal Plan,

pursuant to Title I of the Housing Act of 1949. A copy

of the Urban Renewal Plan in effect at the time the

CDBG activity is carried out, including maps and

supporting documentation, must be maintained for

recordkeeping purposes. Note that this national

objective is not applicable to the State CDBG Program.

Urgent Need

Use of this category is rare. It is designated only for

activities that alleviate emergency conditions. Urgent

HOME and CDBG

need activities must meet the following qualifying

criteria:

• Th

e existing conditions must pose a serious and

immediat

e threat to the health or welfare of the

community; and

• The existing conditions must be of recent origin, or

must hav

e recently become urgent (generally within

the past 18 months); and

• The grantee is unable to finance the activity on its

own; and

•

Oth

er sources of funding are not available.

An exampl

e of urgent need may be when a coastal city

is struck by a major

hurricane and does not have any

other resources to demolish severely damaged

structures that pose a danger to occupants of

neighboring structures.

For more information on CDBG national

objective

s and activity eligibility

Two HUD publications provide excellent guidance on issues

of activity eligibility and meeting national objectives.

• For states, see Guide to National Objectives and Eligible

Activities for State CDBG Programs, available online at

http://www.hud.gov/offices/cpd/communitydevelopment/library/

stateguide/index.cfm

• For entitlement communities, see Community

Development Block Grant Program Guide to National Objectives

and Eligible Activities for Entitlement Communities, available

online at

http://www.hud.gov/offices/cpd/communitydevelopment/library/

deskguid.cfm

CDBG Administrative

Requirements and Caps

Administrative Cap

Under the Entitlement Program, up to 20 percent of

each year’s CDBG grant plus program income can be

obligated for planning and administrative costs.

Program administration costs are costs related to the

overall planning and execution of CDBG-assisted

community development activities. Planning and

administration costs subject to the cap do not include

staff and overhead costs directly related to carrying out

eligible activities since these costs are eligible as part of

those activities.

The administrative cap is applied differently in the State

CDBG Program. Under this program, a state may use

$100,000 plus up to 3 percent of its grant

and program

income for the state’s administrative and technical

assistance costs. All costs within the 3 percent that are

used for administration must be matched by the state.

Note that the CDBG statute was changed on January

23, 2004 to combine the state administrative, planning,

and technical assistance caps and allow states to expend

up to 3 percent for these costs. States are encouraged

to review Section 106(d) of the Housing and

Community Development Act of 1974 (42 U.S.C.

5306(d)) as amended for more information on this

change.

The state may also allow units of local gove

rnment to

charge administrative and planning costs. Local activity

delivery costs can, at the State’s option, be classified as

administrative or project delivery costs. The sum of the

state’s administrative expenses and the unit of local

government administrative expenses may not exceed 20

percent of the state’s grant and program income.

Note that while the Entitlement Program bases its

administrativ

e and planning cap on obligations, the

State Program bases its cap on expenditures of CDBG

funds. Also note that timeframe for the cap is

calculated differently for the State CDBG Program

than for the Entitlement Program. While the

Entitlement Program considers obligations during the

12-month program year, the State CDBG Program

considers expenditures as a percentage of each annual

grant allocation.

Low- and Moderate-Income Benefit

Expenditures

Low- and moderate-income persons are those with

incomes below 80 percent of the median income for

the entire metropolitan area. Entitlement grantees may

use one of the following three definitions of income;

state grantees may choose to follow one of these

definitions or they can choose their own income

definition. HUD will give maximum feasible deference

to the state’s choice.

• Part 5 annual (gross) income;

•

IRS adjusted gross income; or

• Census long f

orm annual income.

As noted above, the primary objective of the CDBG

Progra

m is the development of viable communities

principally for low- and moderate-income persons. To

HOME and CDBG

meet the primary objective, the CDBG regulations

require that grantees expend not less than 70 percent of

CDBG funds for activities that benefit low- and

moderate-income persons. In addition:

• Planning and administrative costs are excluded from

the low- and moderate-income benefit calculation.

• Activities meeting this requirement are those that

qualify under one of the four low- and moderate-

income Benefit National Objective categories:

¾ Area basis;

¾ Limited clientele;

¾ Housing activities; or

Job creation and retention.

• The percentage calculation is based on aggregate

CDBG expenditures over a period specified by the

grantee (up to three years) in a certification to

HUD.

Public Services Cap

The CDBG statute and regulations limit the amount of

funding that can be used for public service activities.

The limit is based on obligations for public services for

a given program year and cannot exceed:

• 15 percent of that program year’s entitlement grant;

plus

• 15

perce

nt of the preceding year’s program income.

Under the State CD

BG P

rogram, the public services

cap is calcula

ted differently. States may not expend

more than 15 percent of a given fiscal year’s annual

allocation plus 15 percent of the program income

distributed by the state. Note that the 15 percent cap

applies to the state, not to the individual local

governments receiving State CDBG funds. A state

could make a grant to a town solely for public service

activities.

Public services carried out by subrecipients or units of

general lo

cal government are subject to the grantee’s 15

percent cap. However, some public services may

qualify in another CDBG eligible activities category.

For example, job training for a specific position within

a company where jobs are being created may be

counted as economic development, rather than public

service.

Program Income

Program income is the gross income received by the

grantee and its subrecipients directly generated from

the use of CDBG funds. In general, program income

must be used prior to drawing down additional funds

from the line of credit. One exception to this rule is

funds in a revolving loan fund. Program income

includes:

• Proceeds from the sale or lease of property

purcha

sed or improved with CDBG funds;

• Proc

eeds from the sale or lease of equipment

purchased with CDBG fu

nds;

•

Gross incom

e from the use or rental of real or

personal property acquired, constructed, or

improved by the grantee (or a subrecipient), less

costs incidental to the generation of income;

• Payments of principal and interest

on loans made

using CDBG funds;

• Proceeds from the sale of loans or obligations

secured by loans made with

CDBG funds;

•

Intere

st earned on program income pending its

disposition (

Note, interest earned on revolving loan

funds must be remitted to the U.S. Treasury at least

annually); and

• Funds collected through special assessments on

proper

ties not owned and occupied by low- and

moderate-income households in order to recover

the CDBG portion of a public improvement.

Note that program income does not include income

earned on g

rant advances from the U.S. Treasury,

except interest on lump sum draw downs. The

following types of income earned on grant advances

must be remitted to the U.S. Treasury: interest earned

from the investment of the initial proceeds of a grant

advance; interest earned on activities determined to be

ineligible; and interest earned on the investment of

amounts reimbursed to the CDBG program account

prior to the use of the reimbursed funds for eligible

purposes. Also, for the purposes of calculating the

program income for the recipient as a whole, payments

made by subrecipients of principal and/or interest on

CDBG-funded loans received from grantees shall be

excluded if such payments are made using program

income received by the subrecipient. The amount of

program income derived from this calculation shall be

used for reporting purposes and in determining the

HOME and CDBG

limitations on CDBG planning/administration and

public service activities.

Program income also does not include:

• Any income received in a single program year by the

grantee and its subrecipients, that does not exceed

$25,000. For the state CDBG program this is based

upon whether no more than $25,000 is retained by a

unit of general local government and its

subrecipients;

• Income generated by certain Section 108 activities

(refer to 24 CFR 570.500(a)(4)(ii) or

570.489(e)(2(iii));

• Proceeds from subrecipient fundraising activities;

• Funds collected through special assessments to

recover non-CDBG outlays of capital

improvements; and

• Proceeds from the disposition of real property that

was acquired or improved by a subrecipient with

CDBG funds

and disposed five years or more after

the expiration or closeout of the grantee’s

agreement with the subrecipient. In the

subrecipient agreement, the grantee may choose a

longer timeframe during which any CDBG related

proceeds to the subrecipient would remain program

income. (Certain conditions apply. See 24 CFR

570.503(b)(8) for more information on entitlement

programs. See 24 CFR 570.489 for more

information on program income for State CDBG

Programs.) Unless a grantee closes out its

participation in the CDBG program, proceeds to a

grantee from the disposition of real property are

considered program income in perpetuity. (See 24

CFR 570.505 and 570.489(e)(3)(i) for additional

information.) Note that the State CDBG

requirements are comparable to the entitlement

requirements except that there is no explicit

requirement for a subrecipient agreement.

Timely Use of Funds

It has become increasingly important for grantees to

spend CDBG funds in a timely manner. Timely use of

funds, in times of tight budgets, demonstrates that

CDBG funds are being used to address unmet

community development needs. Under the provisions

of 24 CFR 570.902(a) of the CDBG regulations, an

entitlement grantee is considered to be timely, if 60

days prior to the end of the grantee's program year, the

balance in its U.S. Treasury Department line-of-credit

does not exceed 1.5 times the annual grant for its

curren

t program year. An entitlement grantee that is

“newly untimely” (i.e., met the 1.5 standard at its last

60-day test) has 12 months to become timely. If that

grantee is not timely at its next 60-day test, there are

two possible exceptions:

• It is currently spending at a 12-month rate that, if

continued, would bring it into compliance by the

following 60-day test, or

• HUD determines that the untimeliness resulted

from factors beyond the grantee’s reasonable

control.

If a grantee does not meet the first possible exception,

it will have the opportunity, at an informal

consultation, to provide information as to why its lack

of timeliness is for reasons beyond its reasonable

control. After that consultation, HUD will consider

the information provided by the grantee and, if a

determination is made that, in fact, conditions were not

beyond the grantee’s reasonable control, the grantee

will be subject to a reduction of the total amount by

which it exceeded the 1.5 threshold.

States’ timeliness is currently based on its timely

distribution of funds to units of general local

government. In accordance with 24 CFR

570.494(b)(1), a state is considered timely if it obligates

and announces all of its grant within 15 months of the

state’s execution of its grant agreement.

Pre-Award Costs

Under certain conditions, CDBG grantees and their

subrecipients may incur costs prior to the effective date

of their CDBG grant agreement with HUD. The

effective date of the grant agreement is the program

year start date, or the date that HUD receives the

Consolidated Plan, whichever is later. Costs may be

incurred as of the date that the final Consolidated Plan

is made public.

Grantees can incur any eligible cost provided it meets

certain conditions:

• The activity for which the costs are being incurred

is included in a consolida

ted plan action plan or an

amended consolidated plan action plan prior to the

costs being incurred;

• Citizens are advised of the extent to which these

pre-award cos

ts will affect future grants;

HOME and CDBG

• The costs and activities funded are in compliance

with the CDBG regulations and the environmental

review requirements;

• The activity for which payment is being made

complies with the statutory and regulatory

provisions in effect at the time the costs are paid for

with CDBG funds;

• CDBG payment will be made during a time no

longer than the next two program years following

the effective date of the grant agreement or

amendment in which the activity is first included,

unless otherwise excepted by the HUD Field

Office; and

• The total amount of pre-award costs to be paid

during any program year is no more than 25 percent

of grant amount for that year or $300,000,

whichever is greater, unless otherwise excepted by

the HUD Field Office.

• The State CDBG Program places no restrictions on

pre-award costs. States can authorize pre-award

costs for their state grant recipients.

Part 3: General Program

Comparison—HOME

versus CDBG

Table 1-2 provides a general comparison between the

HOME and CDBG programs so that grantees are able

to identify the similarities and differences between the

two programs. Note that this chart provides a

summary of the requirements and jurisdictions should

refer to the detailed chapters of the guide and to the

program regulations and statutes for more information.

Table 1-2: A Comparison of HOME and CDBG

HOME CDBG

Organizational Issues

Recipient PJs (States, counties, localities, consortia). Grantees (States, metropolitan cities,

urban counties).

Key Partners CHDOs, nonprofit and for-profit housing CBDOs, nonprofit and public

developers, private lenders. organizations, nonprofit and for-profit

housing developers, nonprofit

organizations serving the development

needs of non-entitlement areas, private

lenders. (24 CFR 570.204, 570.300,

570.420, 570.480, 570.500(c), 570.700)

Projects Under State States can directly undertake projects or they States must fund projects via units of

Programs can work through local governments or general local government. States cannot

nonprofits. States can fund projects make grants to local governments that are

anywhere in the state, including in PJs. Entitlements.

Nonprofit Set-Aside PJs must spend at least 15% of their annual None.

allocations on development projects

undertaken by CHDOs.

HOME and CDBG

Table 1-2: A Comparison of HOME and CDBG

HOME CDBG

Special Nonprofits Community Housing Development

Organizations (CHDOs): nonprofit

development organizations with a board that

is at least 1/3 representative of low-income

residents.

Community Based Development

Organizations (CBDOs) and nonprofit

organizations serving the development

needs of non-entitlement areas. These

organizations undertake community

economic development, neighborhood

revitalization, and/or energy conservation.

Under the Entitlement Program, the

CBDO board is at least 51%

representative of low-income residents.

Subrecipients Any nonprofit or outside public entity that

administers all or part of a HOME activity

on the PJ’s behalf.

A public or private nonprofit agency,

authority, or organization, not including

CBDOs.

A for-profit entity carrying out

microenterprise activities under 24 CFR

570.201(o).

Funding Issues

Timelines 2-year commitment, 5-year expenditure

deadlines. (24 CFR 92.500(d))

Entitlement grantee must have no more

than 1.5 times the amount of the current

year’s formula grant 60 days prior to end

of program year. (24 CFR 570.902(a)).

States should obligate and announce all

grant funds within 15 months of the

execution of grant agreement

Match HOME PJs must contribute at least 25¢ for

every $1 of HOME funds expended during

the federal fiscal year. (24 CFR 92.218-

92.222)

Not required, unless imposed by grantee.

(Note: some state impose a match.) States

are required to match their administrative

costs, capped at 3% (plus $100,000, which

is not required to be matched.)

Eligible Activities

Eligible Activities HOME funds can only be used to support

affordable housing activities and projects.

(24 CFR 92.1 and 92.2)

CDBG funds can be used to support

affordable housing activities, along with

other community and economic

development activities and public services.

(24 CFR 570.201-.206, statutory sections

105(a)(1)–(a)(25))

Housing-Related

Eligible and Ineligible

Activities

Acquisition, rehabilitation and new

construction of rental and homeownership

housing, direct homebuyer assistance (loans,

grants, downpayment and closing costs

assistance), tenant-based rental assistance.

No non-housing related activities. No

assistance to public housing.

Acquisition, rehabilitation of rental and

homeownership housing, direct

homebuyer assistance, new construction

of rental or homeownership housing

when carried out by a CBDO pursuant to

24 CFR 570.204 or 105(a)(15) of the

statute. Can assist public or private

buildings.

HOME and CDBG

Table 1-2: A Comparison of HOME and CDBG

HOME CDBG

Refunding of Assisted

Projects

No assistance to projects already funded with

HOME during the affordability period after

the first year.

Can provide assistance to project already

assisted with CDBG, as long as new

activity is CDBG-eligible.

Tenant-Based Rental

Assistance

Eligible. TBRA rent subsidy formula caps

tenant contribution to 30% of household’s

monthly adjusted income. (24 CFR

92.209(h)).

Direct rental assistance to families is

prohibited, except under limited

circumstances. (24 CFR 570.207(b)(4)).

Administrative Costs Eligible under 24 CFR 92.207. Capped at

10% of annual allocation plus program

income received.

Eligible under 24 CFR 570.205 and 206.

Capped at 20%. A state may use $100,000

plus up to 50% the costs it incurs for

program administration, up to a maximum

of 3 percent of its CDBG allocation. The

State may expend up to 3% of its CDBG

allocation on technical assistance

activities. However, the total the State

spends on both administrative and

technical assistance expenses may not

exceed 3% of the State's allocation. (see

570.489(a) and Section 106(d) of the

statute.)

Low-Income Targeting

Income Definition Can choose from among three definitions of

income: Part 5; IRS; Census long form.

Can choose from among three definitions

of income: Part 5; IRS; Census long form.

State CDBG grantees can choose one of

these three or their own definition.

Income Targeting—

Households Served

HOME funds exclusively serve low-income

households (<80% area median income). (24

CFR 92.216 and 217)

The primary objective of CDBG is to

principally assist low- and moderate-

income persons (<80% area median

income).

All activities must meet one of three

national objectives: low/moderate income

benefit; elimination of slum and blight; or

urgent need.

Aggregate benefits across all activities for

1-3 year period: at least 70% of funds

must assist low- and moderate-income

persons. 24 CFR 570.200(a)(3) and

570.484(a))

HOME and CDBG

Table 1-2: A Comparison of HOME and CDBG

HOME CDBG

Income Targeting --

Rental Units

HOME allows assistance to be targeted

toward particular units. Thus the HOME

units could be a small percentage of the

entire units within a project.

Rental projects assisted with HOME have

deeper income targeting requirements with

specific requirements related to renting units

to very low-income households and to

ensuring that initially 90% of the households

assisted with rental or TBRA funds are at

60% of median and below. (24 CFR 92.216).

Unless the project meets the slum/blight

national objective criteria, the low and

moderate-income housing national

objective will be used. For multifamily

housing, 51% of the units must be

occupied by low- or moderate-income

households. For one-unit structures, each

household must be low- or moderate-

income. For two unit structures, one of

the two households must be low- or

moderate-income. (24 CFR 570.208(a)(3)

and 570.483(b)(3)).

CDBG assistance applies to an entire

multifamily project regardless of the

amount of CDBG assistance. So, 51% of

all units within the project must be

occupied by low- and moderate-income

households unless the project meets a

specific exception related to certain

activities designed to reduce the cost of

new construction. (24 CFR 570.208(a)(3)

and 570.483(b)(3)). In general, CDBG

does not allow for proportional funding

where the number of units is based upon

the amount of CDBG funds (unless the

51% target is reached or the above-noted

exception is triggered).

Affordability

Affordability Period Applies to homebuyer and rental projects.

5–20 years depending on activity type and

funding amount. (24 CFR 92.252, 92.254)

Not required. However, some projects

are required to meet change of use

restrictions. See 24 CFR 570.505 and 24

CFR 570.489.

Rents High and Low HOME Rents are specified

for HOME rental projects. (24 CFR

92.252(a) and (b))

If using low- and moderate-income

national objective, no direct requirement

for specific rent schedule, other than at

least 51% of units in multifamily project

are affordable to low- and moderate-

income tenants. (24 CFR 570.208(a)(3)

and 570.483(b)(3)). Rents must be

affordable, as determined by the

jurisdiction.

HOME and CDBG

Table 1-2: A Comparison of HOME and CDBG

HOME CDBG

Unit Requirements

Unit Quality HOME property standards: No specific property standards required.

Local rehabilitation standards (for

rehabilitation), and

State/local codes or standards, or if none

exists, one of three national model codes,

and

Model Energy Code (for new construction).

(24 CFR 92.251)

Minimum Investment Minimum HOME investment is an average No minimum required.

of $1,000 per unit for project.

Subsidy Limit Capped at the 221(d)(3) limits. Costs must Costs must be reasonable. No maximum

be reasonable. subsidy.

Maximum Property Applies to homebuyer homes and is typically No maximum property value.

Value based on 203(b) limits.

Ongoing Compliance

Ongoing Monitoring Must monitoring compliance with program Must document compliance with national

rules and terms of written agreement. Must objective and terms of written agreement.

also monitor rental properties during the Otherwise, no ongoing monitoring.

affordability period. Must ensure that However, some projects are required to

homebuyer properties meet resale or meet change of use restrictions. See 24

recapture provisions. CFR 570.505 and 24 CFR 570.489.

Re-examinations of Incomes need to be re-examined for Not required under CDBG. Income is

Income HOME-assisted units annually, and re- documented at the time of initial

verified with source documentation every occupancy.

five years—all new tenants in HOME units

must be low-income (80 percent or lower of

the area median income).

Unit Inspections Rental units must be inspected during the None required.

affordability period; inspection schedule is

based on size of the project. TBRA units

must be inspected annually.

HOME and CDBG

Chapter 2:

Using HOME and CDBG for Rental Housing

This chapter summarizes how CDBG and HOME can be used to develop rental housing. It describes the range of approaches that

can be used to create rental housing and the rental housing activities that can be undertaken with HOME or CDBG funds. It

discusses the rules for financing and developing rental housing when combining CDBG and HOME funds and describes ongoing

rules for managing the rental properties over time. The chapter concludes with sample program designs that illustrate how HOME

and CDBG can be combined for rental housing development.

Approaches to Creating

Rental Housing

There are many ways to create affordable rental

housing, and jurisdictions can tailor HOME and

CDBG funds to address local housing market

conditions. For instance:

• In some communities, there is a surplus of available

standard rental housing but it is not affordable to

low-income households. In these communities, the

right approach might be to acquire these existing

units, lower the their cost, and rent them to low-

income households.

• In communities with a sufficient supply of standard

housing, it might make sense to provide assistance

to the tenants, rather than to the owners. This is

known as “tenant-based rental assistance,” or

TBRA.

• In other communities where rental housing exists,

but it is in poor condition, an effective rental

housing program might focus on rehabilitating these

existing structures, or on acquiring and

rehabilitating them.

• In communities that lack a supply of available

housing, and those that are characterized by low

vacancy rates and high rental prices, new

construction might be the best way to create

affordable rental housing.

This section describes each of these approaches and

their applicability to HOME or CDBG programs.

Acquisition

An acquisition program involves purchasing existing

rental units within the community and then lowering

their rents to make them affordable to low-income

households. Usually, this is accomplished by directly

subsidizing the purchase of the units so that the

owner’s ongoing financing costs are reasonable and

therefore, he or she can afford to offer lower rents.

Example: Rental Acquisition Program

The City of Westwyn found that it had a number of modest

rental developments that were in standard condition, but

whose rents were generally out of reach for low-income

households. It worked with a local nonprofit to purchase

the 20-unit Westside Apartments for a total price of

$1,000,000. At that purchase price and with a standard

market rate loan, the nonprofit would have had debt service

that required rents at $700 per month in order to make ends

meet. In order to lower the rents to the $600 and $400 high

and low HOME rents, the PJ provided the nonprofit with a

deferred, forgivable payment loan of $300,000. Since the

nonprofit did not need to make debt service payments on

this loan and only needed to borrow $700,000, it could

afford to offer rents at the HOME rent levels.

The benefit of using an acquisition approach to

developing affordable rental housing is that it can be

very cost effective since no construction is needed. It

can also be used to further mixed-income housing

goals. For example, using HOME funds, a PJ could

assist a developer who was purchasing a 50-unit

building. The HOME funds could be targeted at five

of the total units, with financing capped at the

maximum per unit subsidy limits. These five units

would carry the HOME restrictions related to

affordability, income, unit quality, etc. The remaining

45 units could rent to moderate- or upper-income

people. Note: assuming that the low and moderate-

income housing national objective is being used,

acquisition would work with CDBG funds only if low-

and moderate-income persons occupy at least 51

percent of the units.

The acquisition approach to rental housing can be

successful in communities that have ample rental

housing stock in standard condition. In many

HOME and CDBG

communities, however, there are not a sufficient

number of units that are both standard and reasonably

priced for purchase. For this reason, it may not be cost

effective to purchase existing units and offer them at an

affordable rent.

Both CDBG and HOME funds can be used to acquire

existing rental housing. For HOME, the developer

needs to keep in mind the requirement that the units

meet the applicable local code or national model codes

and standards. If the units are not standard, HOME

can also assist with rehabilitation costs (see below).

Under CDBG, acquisition is an eligible activity,

provided it meets a national objective. Acquiring rental

units for occupancy by low- and moderate-income

tenants would be eligible as a low- and moderate-

income housing activity. Rental housing acquisition

funded with CDBG would need to be undertaken by

the grantee, a public agency, or a nonprofit

organization because CDBG prohibits acquisition-only

housing activities to be conducted by for-profit entities.

In additio

n, CDBG permits for-profit entities to

undertake acquisition with rehabilitation because that is

classified as a rehabilitation activity rather than as an

acquisition activity.

Tenant-Based Rental Assistance

Another method of making existing rental housing

affordable is to offer assistance to tenants to help them

afford their rent. The most common tenant-based

rental assistance (TBRA) model is the Housing Choice

Voucher Program that is run by housing authorities

across the country. Under this program, a household

chooses a standard unit and the housing authority

subsidizes the difference between what the household

can afford to pay, and a fixed rent ceiling known as a

payment standard. The household then makes up the

difference between the actual rent and the housing

authority subsidy.

The benefit of this approach is that it is flexible and

allows the household to choose where they want to

live. Also, TBRA programs can be much more cost

effective than rental development programs. For

example:

TBRA Cost Effectiveness

Assume that it costs $150,000 per unit to build a new rental

unit and the jurisdiction wants to create 50 affordable rental

units. That is a total development cost of $7,500,000.

Assume the project is funded completely with various forms

of public subsidy and that the project has an affordability

period of 20 years.

Compare this to a TBRA program in the same community.

It has a payment standard of $800 based on the FMR.

Thirty (30) percent of the income of a household at 60

percent of median income is $600. So the jurisdiction -- in

general—will make up $200 per unit per month in TBRA

costs or $2,400 per year.

So, the jurisdiction can subsidize 156 families for 20 years

using TBRA for $7,500,000, or, for the same amount, it can

develop 50 units of affordable housing for 20 years. Even if

the public subsidy is only half of the development cost, the

jurisdiction could still fund 28 more families using TBRA.

TBRA may not work in all market conditions, however.

First, it is only effec

tive in communities where there

exists a supply of standard affordable housing. In

many jurisdictions, there are no available units where

households could use their TBRA. In addition, TBRA

does not permanently increase the supply of affordable

housing within the community. If HOME funding is

reduced and the jurisdiction has no other funding

source, or the funding priorities change, there is no

lasting effect on the housing supply.

HOME can be used to create a TBRA p

rogram. The

program options are highly flexible—from a Housing

Choice Voucher model to a security deposit only

program. However, it should be noted that the costs

to administer a HOME TBRA program cannot be

charged as a project cost and must be paid out of the

PJ’s administrative budget, and subject to its 10 percent

cap.

CDBG cannot be used for TBRA because the CDBG

progra

m considers rental assistance as a type of income

payment (i.e., payments directly to or on behalf of

households) which is expressly prohibited, unless it is

conducted as a part of a CBDO eligible activity.

However, the CDBG regulations at 24 CFR 570.201(k)

and the statute at 105(a)(20) allow CDBG funds to be

HOME and CDBG

used to administer HOME TBRA programs (as well as

provide other HOME-related housing services). This

is important because it is a separately eligible CDBG

activity that is not subject to the CDBG administrative

cap. So, although CDBG cannot directly fund TBRA,

it could support the operation of such a program, and

this might be a good opportunity for combining the

two funding sources.

In some programs, rental assistance is provided as

project-based assistance, where a public entity provides

an owner with ongoing assistance to cover his or her

operating costs in return for reduced rents. Unlike

TBRA, project-based assistance is tied to a unit and

does not move with the tenant. Neither HOME nor

CDBG can be used for project-based assistance.

Rehabilitation

Rehabilitation of existing housing is another way of

creating affordable, standard rental housing. Under

this model, a jurisdiction provides low-cost assistance

to help an owner bring his or her units up to a quality

standard. In return, the owner agrees to rent units at

reduced rents to low-income households.

This model can be combined with acquisition so that

the developer is acquiring and rehabilitating the

property. Rehabilitation can be minimal, or it can

sometimes be very extensive, including reconstruction.

The obvious benefit of this approach is that it not only

helps to

house low-income families but it reduces the

number of existing dilapidated housing units in the

community.

This approach to developing affordable rental housing

can

be quite expensive, however. In some

communities, and given some project situations, it can

be more expensive to renovate units than to undertake

new construction. Also, when rehabilitating occupied

units, extensive renovations might cause displacement

and trigger requirements and related costs under the

Uniform Relocation Act and/or Section 104(d)

relocation requirements.

Both HOME and CDBG can be used for rehabilitation

only

and for acquisition with rehabilitation. HOME

requires that all assisted units be rehabilitated in

accordance with a minimum property standard, but

CDBG does not. Under CDBG, the developer can fix

the most critical items (such as emergency repairs of

major systems) but it would not necessarily be required

to bring the entire unit up to housing codes and

standards.

In addition, both programs can be used for historic

preservation as a part of rehabilitation. In these

instances, jurisdictions will want to work with their

State’s Historic Preservation Office (SHPO) to

determine the appropriate scope of work.

Example: Acquisition with Rehabilitation

The town of Eastbrooke has a large number of dilapidated

rental structures. The cost to renovate these structures

exceeds the likely return to any developer. So, they remain

vacant and an eyesore for the community. Meanwhile, the

waiting list for the jurisdiction’s rental program is years long.

So, Eastbrooke creates a program where it will provide

assistance to CHDOs to buy, renovate, and manage rental

properties. The HOME assistance will be used for

acquisition and for extensive rehabilitation and is structured

as a 0% interest rate loan. CHDOs can borrow HOME

funds up to 40 percent of the unit’s total development cost.

The remainder of the funds comes from low-income housing

tax credits (LIHTC) and private loans.

The reduced rate HOME financing allows the CHDO to

cover its development costs and offer units that rent below

the HOME (and LIHTC) rent limits.

New Construction

Jurisdictions can provide affordable rental housing by

building new units. Under this approach, the

jurisdiction typically works with a nonprofit or for-

profit developer who identifies the site, develops the

plans and specifications, and works with a general

contractor to build the units.

The benefit of new construction is that it generates new

afford

able units for the community. In addition to

creating housing, new units can help spur development

of other units and services in the neighborhood.

New construction can also be very expensive, and

delivery of

the new units can take a long time.

HOME can be used for new construction of rental

units. It ca

n finance all or a portion of the costs,

including the acquisition of the site, hard construction

costs, soft costs or an 18-month project operating

reserve. As with other forms of rental development,

the amount of HOME funds invested will dictate how

many HOME units must be provided.

CDBG cannot be used to pay for the har

d costs or the

soft costs of new construction unless the construction

is being undertaken by a CBDO as a part of a

neighborhood revitalization, energy conservation, or

community economic development activity. A

HOME and CDBG

common misconception is that CDBG funds can be

used for soft costs for new construction (such as

architect’s fees, building permits, engineering etc.).

These costs are generally not allowed because they are

not a separately eligible activity unto themselves—they

are necessarily related to the new construction, which is

not generally eligible under CDBG.

The Entitlement CDBG program regulations contain

limitations on the use

of CDBG funds for "soft costs"

related to new housing construction. The Housing and

Community Development Act (HCDA) only lists

activities that are eligible for CDBG funding, and so

has no discussion of new housing construction. Under

the State CDBG program regulations, states are given

the ability to interpret the list of eligible activities in the

HCDA, providing their interpretations are not plainly

inconsistent with the HCDA. States may use the

Entitlement program eligibility regulations as

interpretive guidance.

CDBG can be used to support the development of new

construction by financing the cost of activities that are

separately eligible activities, such as site clearance or

demolition. In addition, CDBG can be used for any

infrastructure that is owned by a public or nonprofit

agency. CDBG can also be used for property

acquisition when it is undertaken by the grantee, a

public agency, or a nonprofit.

Example: New Construction

The town of Glendale needs more rental housing units for its

very low-income elderly residents. However, none of the

buildings in its community are fully adapted for the special

needs of these elderly residents (such as wheelchair accessible

bathrooms, adapted kitchens, live-in nursing aide quarters,

etc.)

So, the PJ worked with a local faith-based nonprofit to

acquire land and build a new 30 unit building for very low-

income seniors. The PJ provided the nonprofit with a

deferred payment HOME loan due only upon sale of the

property. The remainder of the development financing came

from state and foundation grants. The nonprofit conducted

fundraising among the congregation members and the

community at-large in order to raise funds for ongoing

property operation and maintenance.

A jurisdiction might also rehabilitate an existing

building and convert it into affordable units. This is

known as “conversion” and it is treated as

rehabilitation under HOME.

iii

Conversion of existing non-housing structures to new

housing is permitted under CDBG. For example, a

grantee could use CDBG funds to convert an old,

abandoned school into affordable housing. CDBG

treats the conversion of a non-residential building to a

residential use as rehabilitation.

Example: Conversion

The town of Lakeside has an old hotel that is dilapidated and

boarded up. It also has a severe shortage of affordable

rental units.

A for-profit developer wants to buy and convert the hotel

into apartments. They want to have up-scale loft style

apartments on the top floor. However, in return for HOME

assistance, they agree to allow for 40% of the total units to

be occupied by low-income households.

Lakeside determines how much HOME money they can

provide given the costs of the affordable units and provides

that assistance as a 2% interest rate loan where payments will

not start until the 3rd year of the affordability period. This

delayed start time allows the owner to build a market for the

units and stabilize the project’s income and operating

expenses.

Financing and Developing

Rental Housing

This section provides an overview of how rental

properties can be financed and developed using

HOME and CDBG funds. It highlights:

• Devel

opment partners that jurisdictions may wish

to work with;

• Th

e methods of financing and assisting projects;

• Eligible rental

projects;

• Determining assisted units;

• Eligible costs;

• Property standards; and

• Other Feder

al requirements that apply to the

development process.

HOME and CDBG

Partners

In developing rental housing, most jurisdictions work

in partnership with other organizations. In many

communities, rental housing is created by nonprofit

and for-profit developers. While it is eligible for

jurisdictions to develop and own rental housing

themselves, it is not common practice because of the

legal and operational complexities of managing such

property.

There are many roles that partners can play in the

rental housing development process, including:

• Developer. This is the entity that puts together the

rental deal. It finds the financing, arranges for the

property purchase (as applicable), and oversees the

construction process. After project completion, the

developer may or may not retain ownership of the

property.

• Owner. This is the entity that owns the rental

property once it has been built, acquired, or

rehabilitated. This entity is responsible for the

ongoing compliance of the property (as applicable).

• Sponsor. This is an organization (typically a

nonprofit) that works with another organization to

help this other entity to develop the rental housing.

The sponsor typically owns the property during the

development process and assists with assembling

the financing. Upon project completion, the

sponsor typically sells its ownership to the second

entity that becomes or remains the owner.

• Property Manager. In some cases, owners will

select another organization to assist with the

property management once the project is complete.

The property manager may or may not be legally

related to the ownership entity. The role of the

property manager is to oversee the maintenance and

marketing of the units. Typically, the property

manager is responsible for maintaining

documentation to demonstrate compliance with

income and affordability requirements.

• Consultant. There are many consulting roles that

partners can play in the development of rental

housing. For example, some rental projects require

community input. A partner organization can act as

a neighborhood liaison, organizing community

meetings and providing outreach information.

Consultants can also provide services such as

market assessments, tax credit expertise, or

construction management.

• Program Manager. In some jurisdictions, a

nonprofit or other public entity might manage the

rental development program on behalf of the local

public agency. In this instance, it is acting as a

subrecipient to the jurisdiction and its job is to

select and fund projects.

• Lender. A wide range of lenders can act as

partners in a HOME or CDBG-funded rental

housing project. Sometimes lenders are for-profit

companies—such as banks or credit unions. Other

times lenders are nonprofit organizations that may

be either lending their own resources to the project

or acting as subrecipients and lending HOME or

CDBG funds to the project. One special type of

lender that may sometimes participate in HOME or

CDBG programs are Community Development

Financial Institutions (CDFIs). CDFIs are

community-based lenders working to address

housing and economic development needs. Note

that under the CDBG Program, projects undertaken

by CDFIs get special regulatory flexibility related to

applying the national objective for jobs or housing.

Under the HOME Program, PJs are required to invest

some funds in

housing that is owned, developed, or

sponsored by CHDOs. The development of rental

housing is an eligible CHDO set-aside activity and

these expenditures count toward the 15 percent

threshold. In order to count as a CHDO set-aside

activity, the CHDO must be acting in the role of

owner, sponsor or developer. CHDOs can play other

roles in the development process but it does not count

toward the 15 percent minimum CHDO set-aside.

Under the CDBG program, grantees are not required

to w

ork with any one particular type of partner.

Nonprofits and for-profits may play any of the roles

outlined above. However, grantees sometimes find it

beneficial to work with CBDOs. As noted in Chapter

1, CBDOs are a special type of organization whose

purpose is community development. A CBDO may

undertake activities related to neighborhood

revitalization, energy conservation, or community

economic development. Housing–-including rental

housing–-can be a component of these efforts. Note

that under the State CDBG Program, these entities are

generally known as nonprofit development

organizations working under Section 105(a)(15) of the

Housing and Community Development Act, and

HOME and CDBG

individual states may or may not call these

organizations “CBDOs”.

There are several reasons why grantees may wish to

partner with CBDOs or nonprofit development

organizations serving the needs of non-entitlement

areas (referred to generally as CBDOs below):

• CBDOs are intended to be organizations with a

relationship to the community. They offer the local

resident perspective to the development.

• A CBDO is the only entity that is allowed to

construct new housing with CDBG funds (other

than units developed as last resort housing for

relocation purposes). This new CBDO housing

must be in the context of neighborhood

revitalization, energy conservation, or community

economic development.

• If the grantee adopts a Neighborhood Revitalization

Strategy Area (NRSA), or for recipients of State

CDBG funds, a Community Revitalization Strategy

Area (CRSA), any services undertaken by the

CBDO pursuant to the strategy within that area are

not subject to the 15 percent public services cap.

This means that the grantee could fund public

services via the CBDO using CDBG funds without

having to worry about needing to reduce its funding

to other public services activities in order to fit all

activities within the cap. This could be especially

helpful to service-enriched rental projects located

within the NRSA or CRSA area, such as elderly

projects with meal, medical, or counseling services.

It is important to note that there are key distinctions

between CHDOs and CBDOs. Table 2-1 compares

these two types of development organizations.

As noted in Table 2-1, HOME CHDOs that have a

geographic area of operation that does not exceed one

neighborhood will automatically qualify as a CBDO,

regardless of whether they meet other CBDO criteria.

This organization must have received HOME funds or

be expected to receive HOME funds. Note that in

order to qualify as a CBDO activity, the CDBG-

assisted activity must be part of a community economic

development, neighborhood revitalization, or energy

conservation project.

In choosing partners, jurisdictions need to ensure that

they adhere to the Federal requirements related to

conflict of interest. In general, no covered person or

entity may obtain a financial benefit due to his or her

working relationship to the HOME or CDBG

programs. A covered person is a jurisdiction

employee, agent, or officer and their immediate families

and business partners. So, a jurisdiction employee

could not form a development firm and then request

HOME or CDBG assistance to build rental units.

In addition to these requirements, HOME also imposes

requirements related to the occupancy of units. In

general, no owner, developer, or sponsor of HOME-

assisted housing, including their officers, employees,

agents, consultants, or elected officials may occupy a

HOME-assisted unit. Note that there are exceptions

for owner-occupied rehabilitation and rental property

managers or maintenance workers.

Table 2-1: CHDO and CBDO Comparison*

Topic CHDO CBDO

Required set-

aside

15% of the annual grant. None.

Primary mission Provision of affordable housing for low- and very

low-income persons.

Community development, including housing and

economic development. Focus on meeting the

needs of low- and moderate-income persons.

Primary purpose is improving the physical, social

and economic environment of its service area.

Geographic focus Must have a defined geographic service area,

although need not be single neighborhood. May

include multiple jurisdictions, but not the whole

state.

Works within a defined geographic area within the

jurisdiction—does not cover more than one

jurisdiction. This requirement is not applicable to

the State CDBG Program.

Legal status Organized under State and local law. Must have

501(c) nonprofit status from IRS. No profits may

benefit any individual.

May be nonprofit or for-profit, as long as profits are

incidental to operations.

HOME and CDBG

Table 2-1: CHDO and CBDO Comparison*

Topic CHDO CBDO

Board Must be at least 1/3 low-income representatives.

This can include low-income residents or

51% of governing body is low- and moderate-

income residents of, or officers of institutions of, or

residents of low-income neighborhoods or

elected representatives of low-income

neighborhood organizations. Must also have

other means of input by low-income residents.

representatives of low- or moderate-income

neighborhood organizations in their service area.

Board must be nominated and approved by

membership or permanent governing body. The

board requirements are not applicable in the State

CDBG Program.

Public agency

participation

Cannot be an instrumentality of the public

agency. No more than 1/3 of the board may be

representatives of the public sector.

Cannot be an instrumentality of the public agency.

No more than 1/3 of the board may be

representatives of the public sector. The board

requirements are not applicable in the State CDBG

Program.

Capacity &

experience

Must demonstrate 1 year of experience in serving

the community. Must demonstrate staff capacity.

No CDBG regulatory requirement. Jurisdictions

may develop their own requirements.

Assets No specific requirements. At dissolution of the CBDO, its assets cannot revert

to the jurisdiction.

Procurement No specific requirements. Must be free to contract for goods/services of its

own choosing. Not required to be a subrecipient,

but if so designated by the grantee, is subject to 24

CFR Part 84.

Exceptions None CBDOs not meeting above criteria may qualify if

they:

• Are organized under Section 301(d) of the Small

Business Investment Act of 1958;

• Are an SBA approved Section 501 State

Development Company or Section 502 Local

Development Company or a Section 503 SBA

Certified Company under the Small Business

Investment Act;

• Are a single neighborhood CHDO (see text

discussion); or

• Are approved by HUD as being sufficiently

similar in purpose, function and scope.

Eligible activities In order to qualify for the 15% set-aside, must be

acting as an owner, sponsor, or developer of

rental or homebuyer housing. Can undertake

other activities but does not count toward 15

Must be part of neighborhood revitalization,

community economic development, or energy

conservation activities within their geographic area.

percent set-aside.

Subrecipient Not a subrecipient unless running a program on

behalf of the PJ. In this instance, the HOME

Not a subrecipient unless the grantee elects to treat

them as such. If so, additional administrative

funds to the CHDO would not count toward the

15% set-aside. When receiving administrative

funds to operate the subrecipient program, it is

administrative funds, and not CHDO operating

funds.

requirements apply.

Operating

support

Up to 5% of the PJ’s annual HOME allocation

may be allocated for CHDO operating expenses.

Each CHDO may receive up to the greater of

$50,000 or 50 percent of its total operating

expenses in a given fiscal year.

None.

HOME and CDBG

Program income Income earned by CHDOs is project None unless the grantee elects to consider the

proceeds not program income. Project CBDO a subrecipient. Assuming the CBDO is

proceeds may be used for any low-income not a subrecipient, project proceeds kept by them

housing activity. may be used for any lawful purpose.

* Note that the State CDBG Program has a less stringent definition of which organizations qualify under Section 105(a)(15) of

the statute. See U.S. Department of Housing and Urban Development Guide to National Objectives and Eligible Activities for State

CDBG Programs, pages 2-70 to 2-80. Available online at

http://www.hud.gov/offices/cpd/communitydevelopment/library/stateguide/index.cfm.

Forms of Assistance

HOME PJs and CDBG grantees can provide financial

assistance for rental housing in a number of different

ways. Some types of financing that the jurisdiction may

wish to consider, and the risks involved in each, are

shown in Table 2-2.

Table 2-2: Financing Types and Characteristics

Assistance Type Characteristics Uses and Eligibility Risk

Predevelopment

• Pay for project planning • May not be used before • Highest risk because

loans or grants

and pre-construction completion of money is spent before the

activities. environmental review and developer can determine

• Predevelopment expenses

include staff costs of the

developer that are directly

associated with the project,

option to purchase land or

approval of the request for

release of funds and related

certification, except as

authorized by 24 CFR Part

58.

•

whether the project is

feasible.

If project is not completed,

costs are ineligible except

under HOME when

a building, legal fees,

• Eligible under CDBG or

predevelopment costs are

architectural and

HOME if related to an

loaned to CHDOs. In this

engineering fees, appraisals,

eligible project.

instance, the

and possibly loan predevelopment loan may

application fees. be forgiven.

Construction loans

•

A short-term or interim

loan to cover the cost of

constructing or

rehabilitating a project,

with one or more long-

term, permanent loans

taking out (paying off) the

construction loan at

project completion.

•

Pays for the costs of

building the housing.

Eligible under HOME.

Eligible under CDBG if

related to rehabilitation and

not new construction

(unless the grantee is using a

CBDO, since a CBDO may

undertake new

construction).

•

Jurisdiction should verify

that permanent financing

is available before making

such a loan (to make sure

it will be repaid).

Jurisdiction may inherit a

partly finished building if

anything happens during

construction to create a

significant budget shortfall,

or if developer abandons

• Construction loans from

traditional private lenders

are typically at a higher

interest rate than

permanent loans due to

the high risk involved.

•

building.

In such an event, it is

unlikely jurisdiction could

sell building for what has

been invested.

HOME and CDBG

Permanent mortgage

•

loans

•

Bridge loans

•

Proceeds used to repay the

construction, bridge, and

predevelopment loans.

If the permanent financing

replaces other loans,

original loans must be

used for eligible costs.

Jurisdictions may choose

to finance part or all of the

total development costs.

A short-term loan, often

provided by construction

lender, if upon

construction completion,

project does not yet meet

requirements of

permanent financing.

•

Provides long-term

financing; repaid from the

operating income from a

rental or cooperative

housing project

HOME or CDBG assistance

must have been part of the

original financing package.

Eligible under CDBG for

rehabilitation or acquisition.

New construction only

eligible under limited

circumstances (see above).

Used when the project will

not be ready for permanent

financing when

construction is complete,

such as with multi-stage

projects.

May be used when

permanent mortgage lender

wants project to establish a

track record before making

loan.

•

If there is a high vacancy or

unexpected increase in

operating costs, or reserves

are depleted, jurisdiction

may not get repaid.

If not combined with

private financing, ties up

large amounts of HOME

or CDBG funds in a few

projects and, therefore,

risks are concentrated.

Significant changes in the

project’s projected income

or expenses could affect

the availability of

permanent financing, even

if a loan commitment is in

place.

Credit enhancement

• Includes loan guarantees

and mortgage insurance.

•

Eligible under both CDBG

and HOME if the project is

eligible as previously

discussed.

Used to enhance the credit-

worthiness of a project to

attract private lenders who

would not otherwise

• Default requires cash pay-

off of lender.

participate.

Refinancing

• Take out existing debt on

the rental property.

•

Eligible under both CDBG

and HOME if the project is

eligible as previously

discussed.

HOME or CDBG funds

may be used to refinance

existing debt if the funds are

used to rehabilitate the

• Refinancing can be an

se of program

expensive u

resources.

property and the refinancing

is necessary to permit

continue affordability.

Certain restrictions apply.

HOME and CDBG

Eligible Projects

Both HOME and CDBG offer a wide range of options

in the design and selection of rental projects. There is

flexibility in:

• Property and unit types;

• Unit income mix; and

• Targeting for special needs populations.

Property and Unit Types. HOME and CDBG allow

for significant flexibility in the types of properties that

can be used to develop rental housing. Eligible

properties may be:

• Publicly or privately owned; and

• Residential or mixed use. However, HOME can

only pay for the residential portion of the building.

CDBG can be used to pay for both residential and

commercial development although additional

requirements apply.

HOME funds may not be used for development,

operations, or modernization of public housing

projects financed under the Housing Act of 1937.

HOME funds can be used in combination with HOPE

VI funds. CDBG funds can be used to modernize

public housing units but CDBG cannot be used to

operate public housing or to construct new public

housing.

For both programs, there are no preferences for

project or unit size or style. Often when people think

of rental housing they picture large, multifamily

buildings. While these types of buildings are certainly

allowed under both CDBG and HOME, other building

styles and forms of ownership are possible. HOME

and CDBG rental projects may be one or more

buildings on a single site, or multiple sites that are

under common ownership, management, and

financing.

A key distinction in unit types between CDBG and

HOME involves units that were previously funded.

Properties previously financed with HOME during the

affordability period cannot receive additional HOME

assistance unless provided during the first year after

project completion. CDBG funds, on the other hand,

can be used subsequent to the initial CDBG investment

and/or during the HOME affordability period as well,

for a new eligible activity.

Mixed-Income Housing. Both HOME and CDBG

funds allow jurisdictions to develop mixed-income

housing. However, the requirements are handled very

differently under each program. HOME funds may be

used to assist mixed-income projects but HOME funds

may only be used for HOME-eligible costs, and only

HOME-eligible tenants may occupy HOME-assisted

units. So, this flexibility allows jurisdictions to target

resources to particular units within a project.

The amount of HOME money that may be invested in

the mixed-income rental project will depend upon the

maximum per unit subsidy cap, the total eligible costs

for the project, and whether units are comparable. If

units are comparable, the PJ can pay for a

proportionate share of the eligible costs, up to the

subsidy limit. If the units are not comparable, costs

must actually be allocated to the units that will be

HOME-assisted and costs must be capped at the

subsidy limit.

CDBG may also be used to assist mixed-income

projects so long as the national objective is met. That

means that 51 percent of the units must be occupied by

low- and moderate-income households, or the project

must meet one of the slum/blight national objectives.

This is very different than the approach taken by the

HOME Program. Regardless of the amount of CDBG

funding—be it $100 or $10,000,000—if the low- and

moderate-income housing national objective will be

used, 51percent of the units must be occupied by low-

and moderate-income households.

There is one exception to this rule when a grantee is

helping to write down the costs of new construction of

multifamily, non-elderly housing. However, do not

forget that unless a CBDO is involved, the grantee

cannot actually pay for the construction itself but rather

might help through eligible activities such as acquisition

or site clearance. In this instance, CDBG can pay for a

proportionate share of units and the costs (less than 51

percent) so long as at least 20 percent of the units are

occupied by low-and moderate-income households.

HOME and CDBG

Mixed-Income Housing Options

Newtown wants to develop mixed-income rental housing.

It has available $200,000 in HOME funds and $50,000 in

CDBG funds. A developer has a 10-unit rental acquisition

and rehabilitation project that it would like to undertake with

a total development cost of $1,000,000. The City’s per unit

HOME maximum subsidy limit is $150,000.

: If Newtown invested all $200,000 of HOME funds, how many

units would need to be HOME-assisted?

A: Two units. Since 20 percent of the costs are paid by

HOME, 20 percent of the units must be considered HOME-

assisted (assuming units are comparable).

: If Newtown instead invested $50,000 of CDBG in the project, how

many units would need to be occupied by low-income persons?

A: Assuming that this is not a blighted area or site, six of the

units would need to be occupied by low- or moderate-

income households. This project would need to be qualified

under the housing national objective and that requires 51

percent occupancy by low- or moderate-income persons.

Special Needs Housing. There is also a significant

difference between the HOME and CDBG programs

when it comes to special needs facilities. Transitional

and permanent housing for persons with special needs,

including group homes and single room occupancy

(SRO) units, are eligible under HOME and CDBG.

Properties that are “facilities” are not eligible under

HOME, but

are eligible under CDBG. This includes

shelters that include a residential component, such as

homeless shelters or orphanages. These buildings are

not considered housing under CDBG but rather

“public facilities”. This is important for three reasons:

• First, publi

c facilities are not subject to the CDBG

ban on new construction of housing, so grantees

can build new facilities for persons with special

needs.

• Since these u

nits are not housing, they qualify under

the limited clientele national objective rather than

under the housing national objective. If the facility

exclusively serves a clientele that is presumed to be

low- and moderate-income (see Chapter 1 for this

list), the grantee is not required to document

household income.

• Public facilities must be ow

ned by the grantee, a

nonprofit, or another public agency. Therefore,

for-profit firms cannot develop and own a facility

for persons with special needs under CDBG.

Assisted Units

There is also an important difference in the way that

HOME and CDBG approach assisted units. Under

CDBG, the housing national objective is met at the

time that the project is completed and the units are first

occupied. At initial occupancy, 51 percent of the units

need to be occupied by households who are low- or

moderate-income, if the activity is based on the low-

and moderate- income national objective. However, if

those households move out and others move in, there

is no requirement that the grantee evaluate or constrain

the income of subsequent tenants. So, the program

does not include the concept of a “CDBG-assisted

unit” over the long-term, although a grantee can

impose such a requirement.

HOME, on the other hand, establishes long-term

afford

ability periods for HOME compliance based

upon the activity type and amount of investment (See

“Ongoing Compliance” in this chapter for more

detailed information on this topic.) During this

affordability period, certain units that are deemed as

“HOME-assisted” must remain affordable and

occupied by low-income households. There are two

methods of determining HOME-assisted units:

• Fix

ed. When HOME-assisted units are “fixed,” the

specific units that are HOME-assisted (and,

therefore, subject to HOME rent and occupancy

requirements) are designated and do not change

during the affordability period.

• Floating. When HOME-assisted units are

“floating,” the units that are designated HOME-

assisted may change over time as long as the total

number of HOME-assisted units in the project

remains constant.

The floating designation gives the owner some

flexibility in assigning units and can help avoid

stigmatizing the HOME-assisted units.

If the floating designation is used, the owner

must ensure that the HOME-assisted units

remain comparable to the non-assisted units

over the affordability period in terms of size,

features, and number of bedrooms.

HOME and CDBG

Eligible Costs

A wide variety of rental development costs can be paid

for with HOME or CDBG funds provided that these

costs are incurred in the context of an eligible project.

This section highlights eligible direct rental project

costs and discusses approaches to addressing activity

delivery costs.

Direct Project Costs. Eligible rental project

expenditures under HOME or CDBG may include:

• Site acquisition;

• Labor, materials, and other construction costs;

• Energy efficiency improvements;

• Utility connections;

• Inspection, testing, and abatement of lead-based

paint;

• Relocation costs for assisted properties;

• Soft costs such as: financing fees; credit reports; title

binders and insurance; surety fees; recordation fees;

transaction taxes; legal and accounting fees,

including cost certification; appraisals; architectural

and engineering fees, including specifications and

job progress inspections; environmental reviews;

builders’ or developers’ fees; affirmative marketing;

and

• Handicap accessibility improvements.

Remember that CDBG cannot pay for new

construction of rental housing unless it is undertaken

by a CBDO as part of a neighborhood revitalization,

community economic development, or energy

conservation project. However, grantees may provide

support for the development of new rental housing as

an eligible activity. “Support” refers to:

• Acquisition (if purchased by the grantee, or another

public or nonprofit entity);

• Site clearance; and

• Site improvements (if in public ownership).

Note that HOME requires that all units be brought up

to code and it has a minimum investment requirement

of an average of $1,000 per HOME-assisted unit for

the project. So, while handicapped accessibility and

energy efficiency improvements are eligible as a part of

construction, they are not typically able to be stand-

alone activities because these work items alone typically

do not bring a property up to code. CDBG does not

have a minimum investment or code requirement, so

single purpose rental rehabilitation programs are

eligible.

HOME funds can also be used to cover the cost of

funding an initial operating deficit reserve for new

construction and rehabilitation projects. This is not an

eligible cost under CDBG.

• This reserve is meant to meet any shortfall in

project income during the project rent-up period.

• The reserve cannot exceed 18 months.

• The reserve can be used only for project operating

expenses, scheduled payments to replacement

reserves, and debt service.

• Reserves remaining at the end of 18 months may be

retained for reserves at the PJ’s discretion.

• The disposition of any remaining funds at the end

of the 18-month period should be determined in the

agreement between the developer/owner and the

PJ.

Activity Delivery Costs. HOME and CDBG treat the

jurisdiction’s housing program or activity delivery costs

differently. Activity delivery costs include

specifications, inspections, underwriting, loan

processing, and other staff and contracted costs needed

to deliver and oversee the eligible project. Under

CDBG, these types of costs are eligible when needed to

deliver a rehabilitation program or project or if new

construction is being undertaken by a CBDO. They

are considered activity delivery costs and are not

counted toward the administrative cap. Under HOME,

these costs can be charged to a specific project (and

therefore not against the administrative cap), if the PJ

tracks costs unit-by-unit so that they can be included

within the per unit maximum subsidy limit.

Otherwise, the costs have to be charged as

administrative costs, and are subject to the 10 percent

program administration cap.

It is important to note that CDBG contains an

eligibility category that is designed to enable grantees to

use CDBG for housing services under the HOME

program. Under 24 CFR 570.201(k) of the CDBG

regulations and 105(a)(20) of the statute, grantees may

elect to pay for costs related to housing services under

HOME. As noted above, services may be provided to

owners, tenants, contractors, or other entities

participating or seeking to participate in HOME-

HOME and CDBG

funded activities. Grantees may pay for the following

types of HOME costs with CDBG funds:

• Housing counseling;

• Energy auditing;

• Preparation of work specifications;

• Loan processing;

• Inspections;

• Tenant selection; and

• TBRA management.

This is an important addition to the CDBG program

because these costs are a separately eligible activity

under CDBG and are not counted toward the grantee’s

administrative cap. This new flexibility provides a

good option for combining CDBG and HOME.

Property and Neighborhood Standards

There is a significant distinction between HOME and

CDBG when it comes to property standards. Under

CDBG, there are no established rules regarding

property quality. Obviously the grantee should be

prudent and use its funds wisely. CDBG grantees are

free to design rental rehabilitation programs that focus

on particular trouble areas—such as handicapped

access or emergency repairs—without bringing the

entire building up to standard.

However, as with all HOME-assisted properties,

HOME rental properties must meet certain written

standards.

• Acquisition. If no rehabilitation or construction is

planned, the housing acquired must meet state and

local housing quality standards and code

requirements. If no such standards or codes exist,

the property must meet Housing Choice Voucher

Housing Quality Standards (HQS).

• Construction and rehabilitation. Housing that is

constructed or rehabilitated with HOME funds

must meet all applicable state and local codes,

rehabilitation standards and ordinances. If no state

and local codes apply, the property must meet one

of the national standards.

If new construction, the

property must also meet the Model Energy code.

• New construction of rental housing. The site

and neighborhood standards of 24 CFR 983.6(b)

apply to new construction of rental housing. PJs

are required to perform the review and maintain

records that document the results.

Other Federal Requirements

In general, rental housing developed under CDBG and

HOME is subject to similar other Federal

requirements. Jurisdictions should carefully review all

applicable regulations and HUD guidance on other

Federal requirements.

Ongoing Compliance

Ongoing compliance for rental housing is an area

where CDBG and HOME differ significantly. Under

the CDBG program, once compliance with a national

objective is documented, there are not significant

ongoing responsibilities. However, CDBG does

contain requirements related to the change of use of

any real property

within the grantee or a subrecipient’s

control that was acquired or improved using CDBG

funds in excess of $25,000. The recipient/subrecipient

cannot change the use of the CDBG-funded property

unless it consults with citizens and the property still

meets a national objective or the CDBG program is

reimbursed for the current fair market value less any

value attributable to non-CDBG expenditures. For the

Entitlement Program, these requirements apply until

five years after close-out of the grantee’s participation

in the CDBG program or, for subrecpients, for five

years after the expiration of their subrecipient

agreement. For the State CDBG Program, properties

under the control of the unit of general local

government or a subrecipient are covered for five years

after the close-out of the unit of general local

government’s grant. See sections 570.489(j) and

570.505 of the CDBG regulations for more details on

these requirements.

Under HOME, a rental housing project must meet

certain requirements during the affordability period.

This section highlights requirements and

responsibilities after project development.

Affordability Period

HOME-assisted rental units carry rent and occupancy

restrictions for varying lengths of time, depending

HOME and CDBG

upon the average amount of HOME funds invested

per unit:

Activity

Average Per-Unit

HOM

E $

Minimum

Affordability

Period

Rehabilitation or

Acquisition of

Existing Housing

<$15,000/unit

$15,00

0–$40,000/unit

>$40,000

5 years

10 years

15 years

Refinance of

Rehabilitation

Project

Any $ amount 15 years

New Construction

or Acquisition of

New Housing

Any $ amount 20 years

HOME affordability periods are minimum

requirements. PJs may establish longer terms of

affordability for their programs.

If a shorter affordability period is desirabl

e, the PJ or

developer can take steps to minimize the HOME per-

unit subsidy.

• The HOME s

ubsidy can be reduced and replaced

with other funds that do not have long-term

requirements, such as CDBG or state funds; or

• The develope

r may choose to designate a higher

number of HOME-assisted units than required in

order to reduce the HOME investment per unit.

• Exampl

e: Consider Sable Park Housing’s 20-unit,

$400,000 rehabilitation project. Merion City provided

$100,000 in HOME rehabilitation funds and required that

five of the 20 units be designated HOME-assisted. Under

this arrangement, Sable Park would be obligated to keep the

development affordable for 10 years ($100,000

5 =

$20,000 HOME funds per unit, requiring a 10-year

affordability period). If Sable Park Housing designates 10

of the units as HOME-assisted, the per-unit HOME

investment will be reduced to $10,000 per-unit, requiring

only a five-year affordability period.

Affordability restrictions remain i

n force regardless of

transfer of ownership. At the PJ’s discretion, they may

be terminated only upon foreclosure or transfer in lieu

of foreclosure. It is important to note that if the

HOME rental units do not remain affordable for the

full affordability period, the PJ may be required to

repay the HOME investment to HUD.

CDBG has no required affordability period for rental

units. If the low- and mod

erate-income housing

national objective is used, at least 51 percent of the

initial occupants must be low- or moderate-income.

Once the building is leased and this threshold is

reached, the owner has no ongoing liabilities related to

affordability or unit quality. However, grantees may

elect to impose these types of requirements as a part of

their funding agreements. Also note that as previously

described in this chapter, CDBG-funded properties

that are under the control of the grantee, a unit of

general local government or a subrecipient are subject

to requirements related to the change of use.

Rent Requirements

Every HOME-assisted unit is subject to rent limits

designed to help make rents affordable to low-income

households throughout the applicable period of

affordability. These maximum rents are referred to as

“HOME Rents.”

There are two types of HOME rents—High HOME

Fents

and Low HOME Rents:

• High HOME

Rents: Maximum HOME rents are the

lesser of:

The Fair Market Rents (FMRs) for existing

housing; or

Thirty (30) percent of the adjusted income of a

household whose annual income equals 65

percent of median income.

• Low HOME

Rents: For properties with five or more

HOME-assisted units, at least 20 percent of

HOME-assisted units must have rents which are no

greater than:

Thirty (30) percent of the tenant’s monthly

adjusted income, or

Thirty (30) percent of the annual income of a

household whose income equals 50 percent of

median income, or

If a proj

ect has a Federal or state project-based

rental subsidy and the tenant pays no more than

30 percent of his or her adjusted income toward

rent, the maximum rent may be the rent

allowable under the project-based rental subsidy

program.

Some communities receive “rent exceptions” from the

publish

ed FMRs for purposes of the Housing Choice

Voucher program. These rent exceptions do not apply

to the HOME Program. All PJs are required to use the

HOME and CDBG

HOME Program rent limits established by HUD for

rental projects.

HOME rents include utility costs. This means, if

tenants must

pay for some or all utilities, the HOME

rent must be reduced by a utility allowance determined

by the PJ. Annually, the PJ must establish maximum

monthly rents and allowances for utilities for HOME-

assisted rental projects. However, project owners may

submit proposed utility allowances to the PJ for review

and approval.

• Utility all

owances provide a mechanism to reduce

the maximum allowable HOME rents when the

tenant pays some or all utilities.

Example

$728 High HOME

Rent

$577 Low HOME Rent

-$ 50 Utility allowance -$ 50 Utility Allowance

$678 Maximum HOME

rent for 80% of

units

$678 Maximum HOME

rent for 20% of

units

• The utility allowances prepared by the local public

housing authority (PHA) may be used when

adjusting rents. Utility allowances prepared by the

PJ may also be used when adjusting rents.

• Utility adjustments propos

ed by owners/developers

for specific projects that differ from the PHA utility

allowance must be approved by the PJ, and must be

supported by documentation.

Based on changes in area i

ncome levels or market

conditions, HOME rents, as calculated by HUD

annually, may increase or decrease.

• Te

nants must be given at least 30 days written

notice before increases are implemented. Increases

can only be made in accordance with the lease

provisions. For example, rents may not increase

until the tenant’s lease expires.

• HOME re

nts may decrease. While project rent

levels are not required to decrease below the

HOME rent limits in effect at the time of project

commitment, decreasing HOME rents may reflect a

change in market conditions that may force owners

to reduce rents in order to maintain tenants.

• HUD may permit adjustm

ents to the rent structure

if the financial feasibility of the project is

threatened. This is important to lenders providing

financing to HOME-assisted projects.

New rents are effective upon receipt of the new HUD-

publish

ed numbers. However, tenants’ rents should

not be adjusted until their leases are renewed.

HOME program administrators must enforce rent and

occu

pancy agreements through:

• Cove

nants running with the property;

• Deed restri

ctions; or

• Oth

er mechanisms approved by HUD.

Covenants and deed restrictions may be suspended

upon

transfer by foreclosure or deed-in-lieu of

foreclosure. However, while the restrictions may be

suspended for purposes of clearing title, the PJ is still

responsible for ensuring that the low-income

occupancy obligation is fulfilled.

Under the housing national objective, CDBG units

must initially be rented at an “affordable rent.”

However, CDBG does not define what affordable

means. Rather, jurisdictions must adopt standards for

what will be deemed “affordable” under their CDBG

programs and must make these standards public.

Many jurisdictions have ado

pted the HOME rents as

the standard for “affordability” under CDBG. CDBG

only requires that the initial rents be affordable. As

described above, jurisdictions can adopt more stringent

standards for CDBG rent affordability, especially if

they are investing significant resources to acquire or

rehabilitate the units. There are no requirements

regarding rent increases over time or regarding rents

charged to tenants who move into units that are

vacated after initial occupancy. Note, however, that for

both HOME and CDBG funded projects, if the tenant

is in occupancy prior to the project and if the Uniform

Relocation Act or Section 104(d) is triggered, there may

be requirements related to the initial rent that can be

charged to that tenant or related to the percentage rent

increase over time for that tenant. See HUD’s

relocation website at for more information on these

requirements for HOME and CDBG projects at

www.hud.gov/offices/cpd/library/relocation/index.cfm.

Income Eligibility

Both CDBG and HOME dictate income eligibility

requirements for tenants in assisted rental projects.

HOME rental housing has two constraints on

occupancy:

• Program tar

geting rule: The program targeting

rule applies to both rental units and TBRA

HOME and CDBG

In theory, the balance of

the units may be

occupied by tenants with

incomes up to 80

percent of median.

However, in practice,

virtually all remaining

HOME-assisted rental

units will be initially

occupied by tenants with

annual incomes at 60

percent of median or

less, in order to meet the

program targeting rule.

assistance. It specifies that

90 percent of the total

families assisted through the

rental or TBRA program

(counted together) have

incomes that do not exceed

60 percent of the area

median income. The

balance of rental units and

TBRA assistance must assist

tenants with incomes that

do not exceed 80 percent of

the area median income.

This rule applies to all funds expended from each

fiscal year allocation; it is not project specific.

• Project rule: The “p

roject” rule specifies the

occupancy of units in each rental project.

In projects with five or more HOME-assisted

units, at

least 20 percent of the HOME-assisted

rental units must be occupied by families who

have annual incomes that are 50 percent or less

of median income. These very-low-income

tenants must occupy units with rents at or below

the Low HOME Rent level.

Projects with fewer than five

HOME-assisted

units do not have to restrict any units to the Low

HOME Rents or limit occupancy to tenants at

50 percent or below of the area median income.

Under CDBG, if the housing national objective is

being used, the program als

o requires income eligibility

targeting. Under this national objective 51 percent of

the project’s occupants must be low- or moderate-

income. Note that if the rental housing is a single unit

structure, its tenant must be low- or moderate-income.

If the property is a duplex, one of the two occupant

households must be low- or moderate-income.

CDBG has no ongoing requirements related to income

eligibility. Therefore, if the household at initial

occupancy moves out, the jurisdiction and the owner

are under no obligation to ensure that the new

household moving into the unit be low- or moderate-

income. In addition, if a low- or moderate-income

household at initial occupancy becomes over income

during tenancy, there is no obligation to change its rent

or ask that it leave an assisted unit. Jurisdictions may

wish to impose more stringent standards as a part of

their contract with the developer or owner of the rental

housing. Note that properties acquired or rehabilitated

with CDBG assistance in excess of $25,000 and under

the control of the grantee, a unit of general local

government or a subrecipient are subject to the change

of use requirements noted previously in this chapter.

Both CDBG entitlement grantees and HOME PJs now

use the same definitions of income. Juris

dictions may

choose between one of three income definitions:

• Annual gross income under Part 5;

• Adjusted gross income on the IRS 1040; or

• Annual inc

ome as reported on the U.S. Census long

form.

States CDBG

grantees may choose to use one of these

three definitions or they

can choose their own income

definition. HUD will give maximum feasible deference

to the State’s choice of an income definition.

Note that under CDBG, it is sometimes possible to

develop rental housing under the slum/blight national

objective. In this case, no low- and moderate-income

targeting is required but the property or the

neighborhood must be deemed as blighted and the

activity must address the blight.

Ongoing Property Quality

HOME and CDBG differ in terms of the jurisdiction’s

obligation to monitor property quality after project

completion. Under HOME, properties must remain in

standard condition throughout the affordability period.

In order to verify compliance with property standards

and the information submitted by owners on tenants’

incomes, rents, and other

HOME rental requirements

during a project’s period of affordability, HOME rules

require on-site inspections of HOME properties

according to the total number of units in a project as

follows:

Number of Units Inspection Required

1-4 Every 3 years

5-25 Every 2 years

26 or more Annually

Under CDBG, there are no initial or ongoing property

standard requirements. Grantees are not required to

periodically inspect rental units developed with CDBG,

although they may choose to do so. If the grantee

wants to impose this type of requirement, it should

include this in the funding agreement with the

developer or owner.

HOME and CDBG

Chapter 3:

Using HOME and CDBG for Homeownership

This chapter reviews how HOME and CDBG can be used to assist homebuyers. It begins with a discussion of the range of

approaches to creating affordable homeowner units with CDBG and HOME funds. Then it discusses development and financing

rules related to homeownership. Next the chapter covers the on-going responsibilities related to assisting homebuyers. The chapter

concludes with case studies that illustrate how CDBG and HOME can be used together to create homebuyer housing.

Approaches to Creating

Homebuyer Units

Homebuyer programs can be structured in any number

of ways to encourage the acquisition, acquisition and

rehabilitation, or the new construction of affordable

homes. In general, there are two major types of

approaches to creating homebuyer units:

• Development approach: Under this approach the

jurisdiction subsidizes the creation (through

rehabilitation or new construction) of affordable

homebuyer units. These units are then sold to

eligible homebuyers.

• Homebuyer subsidy approach: Under this approach, the

jurisdiction provides a direct subsidy to the

homebuyer to help him or her afford the new

home.

These two approaches can also be used together in

order to lower the cost of developing homebuyer

housing, and to assist individual families to purchase

the home.

Development Approaches

Under the development approach to homeownership

assistance, the jurisdiction funds a nonprofit or for-

profit developer of the housing. The developer

purchases the site and develops the units. These units

are then sold, usually at below market prices, to low-

income buyers. In some instances the jurisdiction

directly develops the housing, but this is not typical.

Options for the development of housing include:

• New construction of units;

• Acquisition with rehabilitation; and

• Development of subdivisions (which may include

new construction and/or rehabilitation).

New Construction. Under this option, the developer

builds new units and then sells these units to low-

income homebuyers. The units may be built scattered

site (at infill or other locations) or they may be built as

a neighborhood.

For new construction, HOME can be used to pay for

costs that are necessary:

• Acquisition of the land;

• Construction costs for the new units;

• Demolition of existing structures; and

• Making utility connections including off-site

connections from the property line to the adjacent

street.

Every HOME-assisted unit must be occupied by a low-

income homebuyer. For the purposes of determining

the affordability period, it is important to look at the

way in which the homeownership assistance is

provided. When HOME provides assistance to a

developer for construction and related costs and the

property is sold to the buyer

at fair market value, the

unit is assisted, not the buyer. This is known as a

“development subsidy.” When the property is

developed using HOME funds and is sold to a buyer at

an amount

below the fair market value, the buyer is

considered assisted and the affordability period is based

upon the difference between the fair market value and

the sales price, assuming that there was no other

assistance provided to the homebuyer. This is known

as “direct homebuyer assistance.” The financing

structure of the homebuyer’s assistance has further

implications for the obligations during the period of

affordability, which are discussed in detail the

“Ongoing Requirements” section of this chapter.

HOME and CDBG

CDBG funds, on the other hand, cannot be used to

finance the new construction of housing unless it is

undertaken by a CBDO as part of a neighborhood

revitalization, community economic development, or

energy conservation project. CDBG can, however, be

used for acquisition of the land, if the acquisition is

conducted by the grantee, a public agency or a

nonprofit. It can also be used for demolition and

clearance.

Acquisition/Rehabilitation. Under this option, the

developer acquires existing property and renovates that

property. The unit is then sold to an eligible

homebuyer, typically at below market prices.

Both HOME and CDBG can be used to acquire

existing units, rehabilitate them, and resell them to

eligible homebuyers. While this activity is eligible

under both programs, it is important to note that

acquired units that are rehabilitated with HOME funds

must meet the HOME minimum property standard

requirements.

Unlike HOME, CDBG does not prescribe a set of

property standards that rehabilitated structures must

meet when assisted with program funds. HUD

recommends that CDBG grantees establish written

property standards for units assisted with CDBG

funds.

Example: Acquisition and

Rehabilitation Turnkey Program

The City of Big Lake wants to encourage homeownership

within its community and it wants to see a number of its

dilapidated and boarded up homes renovated and occupied.

So, Big Lake funds a CHDO to undertake a turnkey

program. The CHDO acquires and rehabilitates substandard

units using HOME funds. These units are then sold at

$10,000 below market to eligible low-income homebuyers.

Development of Subdivisions and Neighborhoods.

Under this option, the developer purchases a large tract

of land and uses that land to develop an entire

neighborhood or subdivision. The homes that are built

in this neighborhood are sold to eligible homebuyers.

CDBG can be used to undertake a wide variety of

activities related to targeted neighborhood

development. In addition to acquisition, rehabilitation,

and infrastructure, CDBG can be used for related

activities such as public services or economic

development. The CDBG program provides grantees

with regulatory flexibility when using program funds to

develop larger-scale neighborhood revitalization

activities within areas designated as neighborhood

revitalization areas (NRSAs) or community

revitalization strategy areas (CRSAs) under the State

CDBG Program. Note, however, that this flexibility

does not remove the general prohibition on new

construction under the CDBG Program.

While the HOME Program does not include special

provisions for PJs developing new neighborhoods or

subdivisions, costs related to the development of the

housing unit(s) are eligible, including on-site

infrastructure and off-site utility hook-ups. Note, a

subdivision that is developed under common

ownership, management, and financing is considered a

single project under HOME. Therefore, a substantial

amount of infrastructure, including new roads,

sidewalks, and utilities, are considered “on-site” in a

subdivision that is developed as one project. These

costs are eligible, but would be subject to the maximum

per unit subsidies. Additional discussion about how

HOME and CDBG can be used for neighborhood

revitalization activities is provided in Chapter 5.

Example: Homebuyer

Neighborhood Development

Friendsville had a neighborhood that needed to be

revitalized. Units were in poor repair and it had a highly

transient population. Friendsville wanted to redevelop the

neighborhood using a New Urbanism approach with

community focused design.

Friendsville owned a large parcel in the middle of this

neighborhood. It donated this land to a nonprofit that

worked with an architect to layout streets and build homes.

These homes were then sold to mixed-income homebuyers.

Units that were to be sold to low-income buyers were

constructed partially with HOME funds.

Direct Homebuyer Subsidy Approach

There are a number of ways that the HOME and

CDBG Programs can be used to directly address

homebuyer needs. These include:

• Providing downpayment and closing cost assistance;

• Assisting homebuyers to finance the purchase of

the home;

• Establishing individual development accounts to

buy a home; and

• Developing lease purchase programs.

HOME and CDBG

The American Dream Downpayment Initiative (ADDI) is a

new source of funds to provide direct assistance to low-

income homebuyers. Enacted in December, 2003, and

administered by the HOME Program, ADDI aims to

increase the homeownership rate, especially among lower

income and minority households, and to revitalize and

stabilize communities. ADDI will help first-time homebuyers

with the biggest hurdle to homeownership: downpayment

and closing costs. The program was created to assist low-

income first-time homebuyers in purchasing single family

homes by providing funds for downpayment, closing costs,

and rehabilitation carried out in conjunction with the assisted

home purchase.

For a comparison of the HOME and ADDI homebuyer

assistance requirements, see Appendix 3-1. For more

information on ADDI, visit the Office of Affordable

Housing Programs’ website at

http://www.hud.gov/offices/cpd/affordablehousing/programs/home/

addi/index.cfm. or at www.hud.gov/addi/

Downpayment and Closing Cost Assistance. One

of the most common methods for assisting low- and

moderate-income households to purchase a home is

the provision of downpayment and closing cost

assistance. Low- and moderate-income households

that are able to afford the monthly cost of

homeownership (i.e., mortgage and insurance), are not

always able to come up with sufficient funds for the

lender’s required downpayment and/or the various up-

front fees and charges that are collectively called

“closing costs.” Both HOME and CDBG allow for

the provision of downpayment and closing cost

assistance to eligible homebuyers.

Under the HOME Program, the provision of

downpayment and closing cost assistance to qualified

low-income buyers is considered an eligible homebuyer

activity. This type of assistance is considered direct

assistance to acquire a property.

Homebuyer assistance may be conducted under two

different CDBG eligible activities: public services and

direct homeownership assistance under 570.201(n). If

the grantee chooses to fund activities under the public

services category, they are subject to the grantee’s

overall 15 percent public services cap. Direct

homeownership assistance under 570.201(n) is not

subject to this cap, but grantees may only pay up to 50

percent of the required downpayment amount. All

assisted households must be low- and moderate-

income under either eligible activity, if the LMI housing

national objective is used.

Homebuyer Financing. Another form of direct

assistance to homebuyers is the provision of some or

all of the financing that enables them to purchase their

home. The jurisdiction can act as a lender or subsidize

the financing offered by the private lender. When

jurisdictions act as a lender, a number of loan forms are

possible including:

• Grants or deferred, forgivable loans;

• Amortizing first position loans;

• Amortizing second position loans (subordinate to a

private lender); and

• Deferred payment loans.

Example: Deferred Payment Loans

The City of Spruceville wants to assist low-income

homebuyers to purchase units. It studied its waiting lists and

found that most low-income buyers simply did not have the

income to fully afford a private loan covering the purchase

price of a modest unit.

So, Spruceville designed a deferred payment loan program.

Under this program, the City lends low-income borrowers up

to $20,000 in HOME funds as a second position loan behind

the private financing. This means that households can

reduce the amount they needed to borrow from the private

lender and thereby reducing their monthly payments. The

loan is not amortizing and is not due until and unless the

homebuyer sells his or her home. At the time of sale a pro-

rata share of the funds will be due back, depending upon

how long the homebuyer has remained in the unit.

When jurisdictions want to encourage a private lender

to make a loan to a low-income family or they want to

make that loan more affordable, they may use a tool

such as:

• Interest rate write-downs;

• Principal write-downs; and

• Loan guarantees (under HOME).

Both CDBG and HOME can be used for most forms

of direct homebuyer assistance, including:

• Subsidizing interest rates and mortgage principal

amounts, including making grants to reduce the

effective interest rate on the amount needed by the

purchaser to an affordable level. (Funds granted

would have to be applied to the purchase price.)

HOME and CDBG

• Subordinating direct loans toward the purchase

price, at little or no interest, so that the total

mortgage will be affordable to the purchaser.

• Under CDBG, paying all or part of the premium

(on behalf of the purchaser) for the mortgage

insurance required up-front by a private mortgagee.

(This would include private mortgage insurance

(PMI).) Note, subsequent payments of this

premium would not be permitted.

See the section below on development and financing

requirements for more detail on methods of structuring

financing.

It is important to note a key distinction between the

development approach and the homebuyer financing

approach when it comes to new construction. In a

CDBG rule dated November 21, 2000, HUD clarified

that the prohibition on new construction under CDBG

does not apply to new units purchased by individual

homebuyers. Individuals may use CDBG assistance to

buy newly-constructed homes. However, unless they

are a CBDO, developers are still prohibited from

building new homes with CDBG funds.

Individual Development Account Programs.

Individual development accounts (IDAs) are dedicated

savings accounts that provide start-up funds to assist

low-income residents:

• To start a business; or

• To purchase a home.

IDAs are typically managed by a community

organization and savings by the participating household

are often matched by foundation grants, employer

contributions, or other funds. The participating

household is often required to participate in counseling

or classes to learn how to manage its finances more

effectively.

HOME and CDBG funds can be used to support IDA

programs. HOME funds can be used to assist IDAs

that are established for the solely for homeownership

assistance purposes only, CDBG funds may be used to

assist IDAs for both eligible purposes.

Specifically, HOME Program funds may be used as a

source of matching funds to an IDA when the

objective is purchasing a home and the account holder

is income eligible. PJs may choose to use their HOME

funds to support IDAs that provide downpayment

and/or closing cost assistance. For further guidance on

using HOME to support homebuyer IDAs, refer to

HOMEfires, Volume 1, Number 8. This is available

online at:

www.hud.gov/offices/cpd/affordablehousing/library/

homefires/volumes/vol1no8.cfm.

The use of grant funds in an IDA program would assist

purchasers and be eligible under CDBG as

homeownership assistance under 24 CFR 570.201(n) or

the statute at 105(a)(24), which makes homeownership

assistance eligible. Generally, the activity will need to

meet the low- and moderate-income housing national

objective, which means that each assisted household

must be low- or moderate-income.

CDBG funds may be deposited in an IDA to capitalize

the account or as matching deposits over the course of

the household’s participation in the program (see notice

CPD 01-12). If the individual does not complete the

requirements of the IDA program, the CDBG funds

must be returned to the grantee and any interest earned

returned to the U.S. Treasury.

When HOME funds are used in conjunction with IDA

programs, HOME may be committed to the account

holder during the course of the household’s

participation in the program but may not actually be

provided until the participating household is ready to

purchase a home. This is due to the statutory

requirement that funds drawn down from the U.S.

Treasury be invested in affordable housing within 15

days of drawdown.

Example: Individual Development Accounts

The City of Falls Point has a special program designed to

assist low-income community members to obtain an

education and get a job. As a part of this effort, the City

offers life skills classes focused on budgeting and savings.

The City saw a real need to assist program graduates to

become homebuyers. While these families usually had jobs

upon graduation from the program, they did not have

sufficient savings to buy a home.

So, the City started an IDA program where it used HOME

funds to match family deposits into an IDA. When the

family reached one-half of the amount needed for a

downpayment, HOME provided matching funds to cover

the other one-half.

Lease Purchase. An alternative to more traditional

homebuyer assistance programs is lease-purchase.

Lease-purchase programs assist eligible households that

currently lease their homes to save for the purchase of

the home during the lease period. The lease period and

HOME and CDBG

amount vary by program. Housing counseling and

homebuyer education are often an integral part of the

lease-purchase program requirements.

Financing and Developing

Homebuyer Housing

If lease-purchase

housing is not

conveyed

within 36

months of signing

the lease purchase

agreement

within

42 months of project

completion

, the

project becomes a

HOME rental project

subject to HOME

rental rules.

Lease-purchase is eligible under the HOME Program

as a form of homeownership assistance. HOME funds

are used to assist a tenant or household currently

renting a unit to purchase the unit. In order to qualify

for lease-purchase

assistance, a household

must be income eligible at

the time that the HOME

lease-purchase agreement is

signed.

This section highlights options and requirements for

developi

ng and financing homebuyer units. It

discusses partners who can work with jurisdictions and

forms of assistance for subsidizing homebuyer units. It

also covers eligible costs, property types, and property

standards. This section concludes with a summary of

the other Federal requirements that apply to

homebuyer housing.

Partners. M

ost jurisdictions work with nonprofit and

for-profit partners to develop homebuyer housing.

Potential roles for partners in homebuyer programs

include the following:

HOME lease-purchase

agreements require that the

enant purchase the unit

within three years of signing

the agreement. In the event

that the rental unit does not

revert to a HOME homeowner unit at the end of the 3-

year period, the PJ has six additional months to identify

an eligible homebuyer to purchase the unit. During

this interim period, the HOME affordable rental

housing requirements at 24 CFR 92.252 apply to the

unit. If an eligible homebuyer has not been identified

at the end of this interim period, the unit must revert

to a HOME rental unit, governed by all applicable

HOME rental housing requirements, including

affordability. Tenants receiving HOME TBRA to

reside in the lease-purchase unit are eligible to receive

HOME lease-purchase homebuyer assistance.

• Actin

g as a subrecipient to manage a homebuyer

program (such as a downpayment assistance

program) on behalf of the jurisdiction. Note: this

partner would need to be a nonprofit or public

agency.

• Taki

ng on a limited technical or administrative role

for the jurisdiction, subrecipient, or developer, such

as marketing the program, or helping the

jurisdiction translate materials into the language

spoken by neighborhood residents, or counseling

buyers/owners.

• Actin

g as a developer to build or acquire and

rehabilitate, homes for eventual sale to homebuyers.

• Actin

g as a community advocate or advisory group.

For further guidance on the use of HOME funds to

assist lease-pu

rchase activities, please refer to

HOMEfires Vol. 1, No. 10 online at:

Forms of Assistance. G

enerally, for homebuyer

assistance programs, the jurisdiction will use one or

more of the following forms of assistance:

www.hud.gov/offices/cpd/affordablehousing/library/

homefires/volumes/vol1no10.cfm.

• Grants;

• Defer

red-payment loans;

Under CDBG, rental assistance to tenants during the

lease period prior to purchase is not g

enerally eligible.

However, at such time as the lessee chooses to exercise

the option to purchase, homeownership assistance can

be provided.

• Bel

ow market-rate loans; and

• Lo

an guarantees (under HOME).

Table 3-1 below lists the advantages and disadvantages

of each

of these forms of assistance.

Table 3-1: Advantages and Disadvantages of Various Forms of Assistance

Subsidy Pros Cons

Grants

• Simple to administer

• Easy to explain

• Often necessary, especially to reach very

low-income households

• Expensive

• No repayment possible

• May be hard to “sell” politically

• May create expectations of additional

free assistance in the future

HOME and CDBG

Table 3-1: Advantages and Disadvantages of Various Forms of Assistance

Subsidy Pros Cons

Deferred Payment

Loans (DPL)

• Simple to administer

• Easy to explain

• Helpful, since no monthly payment

required

• Flexible, allows for repayment

• Can help prevent windfall gain to

borrower if property values increase

significantly

• No payment received on a monthly basis

• Might never be repaid if property has

low value or future appreciation likely to

be limited

Below Market Rate

Loans

• Provides immediate repayment to

government agency

• Allows government agency to act as

“banker”

• A financial payment obligation can help

homebuyers to become more vested in

their home

• Time-consuming and staff-intensive to

process loan requests

• Requires underwriting expertise

• Loans must be serviced after origination

• Can be an inefficient form of leverage,

compared to DPLs and grants

Loan Guarantees

•

sposition of

•

an-to-value and income-to-

debt ratios

• subsidize the cost to the

•

m the lender to the

Can tie up funds for long periods of time

CDBG cannot be used for loan guarantees.

Simple to administer if no defaults, or if

lender is responsible for di

property if default occurs

• Results in high leverage

May induce lenders to make loans by

softening lo

Does little to

homebuyer

Shifts some or all underwriting and

default risk fro

jurisdiction

• No repayments to the program

•

NOTE: For homebuyer activities under the

Direct Homeownership eligibility category,

Eligible Costs. Jurisdictions must ensure that Federal

funds are used only for eligible costs. However, a wide

variety of costs are eligible. In general, th

ere are three

omebuyer programs:

• Program or activity delivery costs; and

can be

ble

ousing. Table 3-2 summarizes these costs.

types of costs for h

• Activity costs;

• Housing counseling.

Eligible Activity Costs. HOME and CDBG

used to pay for a wide range of costs to assist

developers and homebuyers to create afforda

HOME and CDBG

Table 3-2: Eligible HOME and CDBG Costs for Homeownership Programs

Eligible Homebuyer Costs for Direct Homebuyer Assistance Programs

• Purchase price assistance

• Downpayment assistance

• Closing costs, including financing fees, credit reports, title binders and insurance, surety fees, recording

fees, transaction taxes, legal and accounting fees, cost certifications, appraisals

Eligible Homebuyer Costs for Homeownership Development Programs

(Note, for CDBG these costs cannot be incurred for new construction, unless it is carried out by a CBDO.)

• Acquisition of land and existing structures

• Site preparation or improvements, including demolition

• Securing buildings

• Construction materials and labor

• Architectural and engineering fees

• Builders’ and developers’ fees

Relocation Costs

• Replacement housing, moving costs and out-of-pocket expenses

• Advisory services

• Staff and overhead related to relocation assistance

Relocation Costs. Under the Uniform Relocation

Act, tenants who live in units that are purchased with

Federal funds and who are asked to move out, are

entitled to certain benefits. This applies to

homeownership programs, as well as rental programs.

So, if a HOME or CDBG-funded homebuyer

purchases a unit that is currently occupied by a tenant

and that tenant is displaced, the tenant is entitled to

relocation assistance, even if the sale was voluntary for

the owner of the property. Both HOME and CDBG

can be used to pay for the costs to relocate these

tenants. Note that if the only form of Federal

assistance is provided under ADDI, the URA is not

triggered for FY2004 funds and beyond.

Program or Activity Delivery Costs. Program or

activity delivery costs are those jurisdiction or

subrecipient costs that are necessary to deliver the

homebuyer program. They include costs such as:

• Affirmative marketing and marketing costs;

• Inspections;

• Environmental reviews;

• Specifications, if used for development;

• Underwriting; and

• Other project costs incurred by the jurisdiction that

are directly related to a specific project.

As noted in the previous chapter, CDBG and HOME

handle program delivery costs differently. Under

CDBG, costs for deli

very of a program are covered

the maximum

ince

r 24

under the program and therefore are outside of the

administrative cap.

Under HOME, delivery costs can also be charged to

the project if the jurisdiction tracks the costs to specific

addresses and includes these costs within

subsidy limit. If the costs cannot be attributed to a

specific project, they must be counted as

administrative. As noted in the previous chapter,

CDBG can pay for program delivery costs for HOME

projects, including tasks such as energy auditing, work

specifications, loan processing, or inspections. S

these are eligible costs as housing services unde

CFR 570.201(k), they do not count toward the

jurisdiction’s CDBG administrative cap.

Housing Counseling. Many jurisdictions offer

housing counseling and education to homebuyer

program participants. In some cases participation in

such courses is a required part of program eligibility.

HOME and CDBG

The term “counseling” is used broadly and may range

from one-on-one credit cou

nseling to classes on home

•

arge

erating expense when incurred by a

rantees

ery

g would be

i .

serve as the purchaser’s principal

•

oing Requirements” section of this

th the

ty requirements apply to the rental

¾ f

including long-

ust

o units, at least one

•

f recognized as homeownership by state

•

ast

ied

the HOME Final Rule at 24 CFR 92.254

(

•

a median purchase price for that

type of housing.

maintenance or budgeting.

Homebuyer counseling is an eligible cost under

HOME, and might be charged as a project soft

cost, an administrative cost, or, if provided by a

CHDO, a CHDO operating expense. The method

for charging these costs depends on who receives

the counseling, and who incurs the cost. To ch

counseling as a project cost, the household or

individual counseled must become an owner of a

HOME-assisted unit. When counseling costs are

incurred by a project owner or developer, the cost

must be charged as a project soft cost. For buy

education and counseling that is not targeted

specifically to buyers of HOME-assisted units, th

costs must be charged as administrative, or as a

CHDO op

CHDO.

Grantees have several options to set up counseling

programs under CDBG. The CDBG statute allo

grantees to pay housing services costs related to

administering HOME Program activities. So, g

may choose to use CDBG to pay for housing

counseling related to a HOME homebuyer project.

Grantees can also set up a housing counseling progr

as a public service activity. These funds will count

towards the grantee’s 15 percent cap on public servic

expenditures. A third option for providing housi

counseling under CDBG is to do so as part of a

CDBG-funded housing activity as a program deliv

cost. Under this option, the grantee would offer

counseling as part of its homeownership assistance

program and the costs of the counselin

ncluded in the cost of the program

Eligible Property Types

Both CDBG and HOME permit a wide variety of

homebuyer unit types. Eligible property types include

any property that will

residence, including:

• A one-unit property;

A two- to- four-unit property;

If HOME funds are used to assist a purchaser to

acquire one unit in a two- to- four-unit propert

and that unit will be the principal residence

the purchaser, the long-term affordability

requirements apply to the assisted ownership

unit only. See the discussion on affordability

the “Ong

chapter.

If HOME funds are used to help a purchaser

acquire one or more rental units along wi

homeownership unit, the HOME rental

affordabili

units.

PJs have the option of designating all or some o

the units as HOME-assisted. If so designated,

HOME requirements will apply,

term affordability requirements.

If CDBG is used to purchase, if the property is

three or four units, 51 percent of the units m

be occupied by households that are low- or

moderate-income; if it is tw

unit must be so occupied.

• A condominium unit;

A cooperative unit or a unit in a mutual housing

project (i

law); or

A manufactured home. Under HOME, at the time

of project completion, the manufactured housing

must be connected to permanent utility hook-ups.

The manufactured housing must be located on la

that is owned by the manufactured housing unit

owner, or on land for which the manufactured

housing unit owner has a lease for a period at le

equal to the applicable period of affordability.

It is important to note one key distinction between

CDBG and HOME as it relates to eligible properties.

HOME requires that properties not exceed a specif

maximum value. Under HOME, the value of any

homebuyer/homeowner-occupied property may not

exceed 95 percent of the median purchase price fo

that type of single family housing for the area, as

published by HUD. PJs also have the option of

conducting a specialized market analysis that meets

certain requirements established by HUD. (These can

be found in

(a) 2)(iii).)

Acquisition only. Under HOME, in the case of

property that does not require rehabilitation, the

sales price of the HOME property to be acquired by

a homebuyer may not have a value that exceeds 95

percent of the are

HOME and CDBG

• Acquisition and rehabilitation. If rehabilitation is

required, the value of the property after

rehabilitation may not exceed 95 percent of the area

median purchase price for that type of housing.

The after-rehabilitation value estimate should be

completed prior to investment of HOME funds.

CDBG imposes no property value restriction.

Property Standards

As noted previously, CDBG and HOME differ on the

required property standards. As with all HOME-

assisted properties, homebuyer properties must meet

certain written standards to ensure the health and safety

of its beneficiaries, and the longevity of properties it

has invested in.

• Acquisition.

If no rehabilitation or construction is

planned, the housing acquired must meet state and

local housing quality standards and code

requirements. If no such standards or codes apply,

the property must meet Housing Choice Voucher

Housing Quality Standards.

• Rehabilitation and new constr

uction. Housing

that is constructed or rehabilitated with HOME

funds must meet all applicable state or local codes,

rehabilitation standards and ordinances, and zoning

ordinances. If no state or local codes apply, PJs

must use a national model code.

vii

New

construction must also meet the Model Energy

Code.

• Manufacture

d housing. Manufactured housing

must meet the Manufactured Home Construction

and Safety Standards established in 24 CFR Part

3280, which pre-empt state and local codes covering

the same aspects of performance for such housing.

PJs providing HOME assistance to install

manufactured housing units must comply with

applicable state and local laws or codes. In the

absence of such laws or codes, the PJ must

comply with the manufacturer’s written

instructions for installation of the manufactured

housing units.

Manufactured housing that is rehabilitated with

HOME funds must meet the requirements

outlined above that apply to all housing

constructed or rehabilitated with HOME funds.

CDBG imposes no minimum property standard.

Howev

er, grantees may wish to impose their own

standards.

Other Federal Requirements

There are a number of other Federal requirements that

apply to the development or financing of homebuyer

units. Jurisdictions should carefully review the

regulations and HUD guidance related to these

requirements.

Ongoing Requirements

This section highlights the ongoing requirements

related to homebuyer housing. This includes

compliance with the HOME affordability period and

ensuring the focus on low-income homebuyers.

Affordability Period

HOME requires an affordability period for homebuyer

units. CDBG has no such provisions, but grantees may

wish to impose these types of requirements.

During the long-term affordability peri

od, homebuyers

who receive HOME assistance to purchase their homes

must continue to live in the HOME-assisted property

as their principal residence. Although the assisted

homebuyer must be low-income at the time the

HOME funds are committed, once the qualified

HOME and CDBG

homebuyer purchases the property there are no further

income limit requirements that apply to the existing

homeowner.

However, if the assisted homebuyer sells his/her

property during the affordability period, who can buy

the property and whether the PJ recaptures any funds

are determined by the provisions of the recapture or

resale agreement that the PJ executed with the

homebuyer at the time the HOME assistance was

committed.

The long-term affordability period for HOME-assisted

homebuyer housing is determined by the per-unit

amount of HOME assistance that enabled the

homebuyer to purchase the property, as follows:

• If the per-unit HOME assistance is less than

$15,000, the affordability period is five years.

• If the per-unit HOME assistance is between

$15,000 and $40,000, the affordability period is ten

years.

• If the per-unit HOME assistance is greater than

$40,000, the affordability period is 15 years.

The method for determining the amount of “HOME

assistance,” for the purposes of determining the period

of affordability, varies depending on whether the PJ

chooses to use a recapture option or a resale option for

controlling home sale during the affordability period.

The recapture option and the resale option respond to

different market conditions. In its Consolidated Plan,

the PJ must describe the recapture or resale guidelines

it will use for each homebuyer program. The PJ may

establish more than one type of option for the same

program, provided the PJ advises the homebuyer about

which option will be used before the HOME funds are

committed.

Recapture Option

Recapture is a mechanism for the PJ to recover all or a

portion of the direct HOME assistance if the initial

HOME-assisted buyer voluntarily or involuntarily

(through a foreclosure) sells the house during the

affordability period. When a recapture option is used,

the homeowner is at liberty to sell the HOME-assisted

property to any buyer, at any price the market will bear.

When a PJ uses a recapture option, the period of

affordability is based on the amount of direct HOME

assistance that enables the buyer to purchase the unit.

This includes any HOME assistance that reduces the

purchase price from fair market value to an affordable

price, or otherwise directly subsidizes the purchase by

the homebuyer (such as downpayment assistance,

closing cost assistance, mortgage financing, or interest

rate buy-downs). This does not include the amount of

HOME assistance in excess of fair market value that

might be used to produce the unit.

For example, a PJ provides $75,000 in HOME

development funds to a developer who sells the property for

fair market value at $60,000. The homebuyer is also

provided a HOME downpayment assistance grant in the

amount of $5,000. The PJ uses a recapture option to

ensure affordability. The period of affordability for this

property is five years because the property was sold for fair

market value and the direct assistance to the buyer is

therefore $5,000.

Alternately, if the fair market value of this same property

were $75,000 and the developer sold the property to the

owner for $60,000, the period of affordability would be

ten years because the assistance that enables the buyer to

purchase the unit is $20,000 ($15,000 subsidy to write

down the purchase price plus the $5,000 downpayment

assistance).

For the repayment option, the HOME regulations

require that PJs limit the recapture amount due upon

resale to net proceeds, and if there are no net proceeds

or the proceeds are insufficient to repay the HOME

investment due, the PJ may recapture an amount less

than or equal to the net proceeds. The net proceeds

are the sales price minus loan repayment (other than

HOME funds) and any closing costs. This means that

if there is not enough net proceeds at the resale to

repay the PJ the entire HOME subsidy that is due, PJs

are not liable to HUD for difference between the

original investment and amount available at the resale

(or foreclosure). For more information on this issue

see the HOME regulations at 92.254 and the

HOMEfires, Volume 5, Number 2. This is available

online at

www.hud.gov/offices/cpd/affordablehousing/library/homefires/

index.cfm

Once the recapture occurs, the long-term affordability

period terminates and HOME requirements no longer

apply to the property. The home can be sold to any

homebuyer, regardless of income.

Resale Option

The resale option ensures that the HOME-assisted unit

remains affordable over the entire period of

HOME and CDBG

affordability, even in the event of a subsequent sale.

This option is often preferred by PJs in high cost or

rapidly appreciating housing markets. Using this

option, the PJ may either require the owner to sell to

another eligible low-income homebuyer or establish a

“presumption of affordability.” When the resale

option is used, the period of affordability is based on

the total amount of HOME funds used to assist the

acquisition, development, and purchase of the housing

(i.e., the HOME investment).

Resale Option with Development Subsidies. The

resale option must be used when HOME assistance is

provided only as a development subsidy and there is

no direct HOME assistance to the homebuyer. Note

that when the resale option is used, the affordability

period is based on the total amount of HOME

assistance invested in the housing.

For example, the PJ provides $50,000 in HOME

assistance as a construction loan to a developer. The

appraised value after construction is $45,000 because of

neighborhood and market conditions. The house is sold

for the fair market value of $45,000. Since there is no

direct assistance to the homebuyer in this instance, the

resale option must be used. The affordability period is

fifteen years based on the total amount of the HOME

investment, or $50,000.

Sometimes HOME assistance is structured so that both

a development subsidy and assistance to the

homebuyer are provided. This can occur when the PJ

subsidizes the construction and developer sells the

property to a low-income buyer at less than the fair

market value. Other times this occurs when a PJ not

only subsidizes the development, but also provides

assistance to the homebuyer, such as downpayment or

closing cost help. If a property is sold for less than the

fair market value or if a homebuyer receives a subsidy,

it is known as “direct homebuyer assistance.” When

the homebuyer is provided direct assistance, the PJ has

the option of imposing either resale or recapture

requirements. If the resale option is used, the

minimum affordability period must be based on the

total amount of HOME funds invested in the

acquisition and development of the property plus any

additional HOME funds directly assisting the

homebuyer. If the recapture option is used, the

minimum affordability period is based on the amount

of HOME assistance that enabled the homebuyer to

purchase the property, as described above under the

Recapture Option.

Sale to an Income-eligible Homebuyer. The resale

option requires the following criteria to be met:

• The new purchaser must be low-income and occupy

the property as the family’s principal residence.

• The sales price must be affordable to a reasonable

range of low-income homebuyers, as defined by the

PJ. Many PJs choose to establish the maximum sales

price by calculating the maximum principal, interest,

taxes, and insurance (PITI) that could be paid by a

reasonable range of low-income households without

exceeding 30 percent of gross income (a widely used

standard of housing affordability).

• The original homebuyer, now the home seller, must

receive a fair return on his or her investment, as

defined by the PJ. The PJ should identify its

method for determining a fair return in the written

resale documents that apply to the property. The

homeowner’s investment includes any

downpayment, loan principal payments, and capital

improvements financed by the homeowner.

• Once an affordable price that offers a fair return to

the seller is established, a PJ may choose to require

the repayment of all or a portion of the HOME

grant or loan upon resale, should net proceeds from

the sale allow this. This is most likely to occur in

housing markets where prices are appreciating.

Presumption of Affordability. This option relies on

the presumption that a specific neighborhood in its

entirety is affordable and that it will continue to remain

affordable for the foreseeable future, and therefore, any

sale within that neighborhood will be affordable. In

other words, market forces will ensure the continued

affordability of HOME-assisted properties, and the PJ

can presume the property will be sold at an affordable

price to another low-income household. In order to

rely on a presumption of affordability, the PJ must

demonstrate that the neighborhood is, and is likely to

remain, affordable by undertaking a market analysis and

documenting the affordability of the neighborhood in

accordance with specialized procedures established by

HUD and outlined in the HOME Final Rule at 24 CFR

92.254 (a)(5)(i)(B). This analysis is subject to HUD

approval, and must be periodically updated by the PJ.

Providing HOME Assistance to the Second Buyer.

Under the resale option, if a new homebuyer receives

HOME assistance to purchase a property that has

previously been assisted with HOME funds, the PJ

may terminate the original period of affordability. A

HOME and CDBG

new period of affordability may be established based

on the amount of the direct HOME assistance

provided to the new homebuyer, regardless of when

during the initial period of affordability the property is

sold. The PJ also has the option of retaining the

original affordability period. If no new HOME

assistance is provided, the new homebuyer must

assume the remaining term of the original long-term

affordability period.

Under both the resale and recapture options, the

HOME regulations now allow for the investment of

additional HOME funds to preserve homebuyer

housing for which HOME funds were already used.

Specifically, PJs may use additional HOME funds to

acquire housing through a purchase option, right of

first refusal or other preemptive right before

foreclosure, to acquire the housing at foreclosure sale,

to undertake any necessary rehabilitation, and to

provide assistance to another eligible homebuyer. (This

provision does not apply if the PJ forecloses on its own

HOME loan.) The per unit subsidy limit applies to the

total HOME funds used for the housing (the original

amount plus the additional amount); however,

administrative funds may be used for the acquisition

and reimbursed upon the sale to a subsequent eligible

homebuyer.

Enforcing Resale and Recapture

Provisions

To enforce both resale and recapture provisions, PJs

must execute an appropriate written agreement with

the homebuyer. In addition, in order to enforce the

resale provisions (except when a “presumption of

affordability” has been approved by HUD), the PJ

must impose a deed restriction, covenant running with

the land or similar legal mechanism approved by HUD.

Amounts subject to recapture provisions should be

additionally enforced through deeds of trust, notes or

mortgages. Most lenders and secondary market entities

have loan products that accommodate these provisions,

as long as they allow for the deed restriction or other

restrictions to be lifted in the case of foreclosure. PJs

can address lenders’ concerns, as the HOME Program

permits the affordability restrictions to terminate upon

foreclosure. As noted previously in this chapter, when

the

recapture requirement is triggered by a sale

(voluntary or involuntary) of the housing, and there are

no net proceeds or the net proceeds are insufficient to

repay the HOME investment due, the participating

jurisdiction may recapture an amount less than or equal

to the net proceeds.

Low-Income Targeting

All HOME beneficiaries must be at or below 80

percent of the area median income, adjusted for

household size. Under CDBG, unless the home is

located in a blighted area or in some way qualifies for

the Urgent Need national objective, households must

also be low- and moderate-income.

viii

HOME PJs and entitlement CDBG grantees have the

option to choose one of three accepted methods for

calculating household income:

• Part 5 definition of annual gross income (24 CFR

Part 5.609);

• Census Long Form definition of annual income; or

• IRS 1040 definition of adjusted gross income

HUD provides a Web-based tool to assist jurisdictions

in calculating income eligibility of program applicants.

The HOME Income Calculator is available online at

http://www.hud.gov/offices/cpd/affordablehousing/

training/calculator/index.cfm.

This Web-based resource provides concise, easy-to-

understand guidance on determining the income and

allowances of applicants to HOME-funded programs.

State CDBG grantees may choose to follow one of

these three definitions, or they can choose their own

income definition. HUD will give maximum feasible

deference to the State’s choice of an income definition.

Further guidance on the calculation of income

eligibility under the HOME Program can be found in

the HOME program model guide, Technical Guide for

Determining Income and Allowances for the HOME Program.

Copies of this model guide are available through the

HOME Program online library at Model Program Guides,

www.hud.gov/offices/cpd/affordablehousing/library/modelguides

Note that under CDBG, all activities—including

homebuyer activities—must meet a national objective.

In the past, there was confusion on the part of some

grantees that believed that homebuyer activities could

be undertaken under the area benefit or limited

clientele low- and moderate-income national objectives.

In fact, the only low- and moderate-income national

objective that can be used for homebuyer activities is

the housing national objective. This means that every

HOME and CDBG

homebuyer will need to be low- or moderate-income in

order to use this national objective.

There is one exception to this rule. If a grantee has

adopted a Neighborhood Revitalization Strategy Area

(localities) or a Community Revitalization Strategy Area

(states), then all of the housing (including rental and

homeowner rehabilitation) for which it obligated funds

in the area during a given program year may be counted

toward the housing national objective and 51 percent

of all the assisted units would need to be occupied by

low- or moderate-income households.

However, if the grantee is using the direct

homeownership assistance category at 570.201(n), all

assisted households must be low- or moderate-income.

The statute states that direct homeownership is for

low- and moderate-income persons and therefore all

households receiving assistance under this category

must indeed be low- or moderate-income. The units

created under a direct homeownership program may be

included when aggregating housing units in a NRSA

but none of the households provided homeownership

assistance under 24 CFR 570.201(n) may be non-low-

or moderate-income. However, as long as combined

with other CDBG housing assistance programs, such as

rehabilitation or acquisition for new construction, for

which CDBG funds are obligated during the program

year, they may be included in the aggregation.

Example: A grantee obligates CDBG for ten housing

units in a NRSA during the fiscal year. Five are

provided homeownership assistance under 24 CFR

570.201(n) and, by statute, must be occupied by low- or

moderate-income households. Another five units received

rehabilitation assistance. To meet the housing low

moderate income national objective, six of the ten units

(51 percent) must be occupied by low- and moderate-

income households. So, only one of the rehabilitation

units must be occupied by a low- or moderate-income

household in order to meet the LM housing national

objective.

HOME and CDBG

Appendix 3-1

American Dream Downpayment Initiative (ADDI)—Side-

By-Side Comparison of Downpayment Assistance

Requirements—By Source of Funds

ADDI FY 2003 Funds

(2003 HUD

Appropriations Act)¹

ADDI FY 2004-2007 Funds

(ADDI Legislation)¹

HOME Allocation

(NAHA)¹

FORMULA

Need² for, and prior

commitment to, assistance

to homebuyers

Need² by state; then, by local

PJ. Funds to local PJs

w/populations of more than

150,000 or allocation greater

than $50,000 only

HOME Formula

INELIGIBLE PJs³ The Commonwealth of Puerto

Rico and local PJs in Puerto

Rico

ELIGIBLE

HOMEBUYERS

Must be “first-time”

homebuyer

Must be “first-time” homebuyer No “first-time”

homebuyer requirement

ELIGIBLE USES OF

FUNDS

Downpayment assistance Downpayment assistance and

rehabilitation. Rehabilitation

must be completed within one

year of purchase

All HOME eligible

activities. Rehabilitation

property standards must

be met within 2 years of

purchase

USE OF FUNDS

FOR ADMIN

COSTS

Not eligible to pay admin

costs; included in

calculating HOME 10%

admin limit

Not eligible to pay admin costs;

not included in calculating 10%

HOME admin limit

10% of HOME funds

may be used for HOME

admin, and the costs of

administering ADDI

ASSISTANCE CAPS Subject to HOME

maximum per-unit

subsidy

Per-family limit: The greater of

$10,000 or 6% of purchase

price; Also subject to HOME

maximum per-unit subsidy when

used in combination with

HOME

Subject to HOME

maximum per-unit

subsidy

MATCH Match requirement No match Match requirement

URA Subject to URA Not subject to URA Subject to URA

PROGRAM

INCOME

Program income

generated under ADDI

treated as HOME

program income

Program income generated

under ADDI treated as HOME

program income

HOME program

income requirements

HOME and CDBG

ADDI FY 2003 Funds

(2003 HUD

Appropriations Act)¹

ADDI FY 2004-2007 Funds

(ADDI Legislation)¹

HOME Allocation

(NAHA)¹

REALLOCATIONS No reallocation of funds

is possible since the 3-year

statutory limit on

availability of

appropriations will result

in any funds recaptured

after 24 months for failure

to meet the commitment

deadline being returned to

Treasury

Funds reallocated as part of the

next fiscal year’s ADDI formula

distribution

HOME reallocation

requirements

CHDO Not subject to CHDO

set-aside; not an eligible

use of set-aside funds

Not subject to CHDO set-aside;

not an eligible use of set-aside

funds

15 percent of HOME

allocation set aside for

CHDO projects;

downpayment assistance

not an eligible CHDO

set-aside activity

CONSOLIDATED

PLAN

2004 Action Plan must

address the use of these

FY 2003 ADDI funds

Two new narratives (“outreach”

and “suitability”) required

beginning with the 2004 Action

Plan in order to be eligible for

ADDI funding; the Action Plan

must also address the use of

ADDI funds

No change

Statutory source of requirements.

“Need”: The percentage of low-income households residing in rental housing based on U.S. Census data.

NOTE: Insular Areas are not included in the definition of PJ in the HOME Program. Therefore, Insular Areas

will not receive ADDI funding in FY 2004 and subsequent allocations. Funds allocated to Insular Areas in FY 2003

were 0.2% of the combined HOME/ADDI appropriation.

NOTE: Project soft-costs for the delivery of ADDI-funded downpayment assistance and (except for FY 2003

ADDI funding) rehabilitation are an eligible use of ADDI funds.

HOME and CDBG

Chapter 4:

Using HOME and CDBG for Homeowner

Rehabilitation

This chapter describes the range of approaches used by jurisdictions to conduct homeowner rehabilitation activities with HOME and

CDBG funds. The chapter discusses key options and rules related to financing and undertaking homeowner rehabilitation programs.

It concludes with sample case studies to illustrate how HOME and CDBG can be used strategically for homeowner rehabilitation.

Approaches to Homeowner

Rehabilitation

There are a wide variety of rehabilitation approaches

that are possible under the HOME and CDBG

programs, including:

• Minor rehabilitation, including minor repair

programs and single purpose programs, such as

emergency repair or handicapped accessibility

programs;

• Moderate or substantial rehabilitation, including

whole house rehabilitation;

• Reconstruction;

• Historic preservation;

• Lead-based paint abatement;

• Code enforcement; and

• Home-based business rehabilitation.

Minor Rehabilitation

Under the minor rehabilitation approach, the

jurisdiction funds a minor level of repairs only. This

might include working on specific work items—such as

those items most in need of repair or those in

imminent danger of failing.

This approach also includes specialty programs such as

those designed specifically to address:

• Handicapped accessibility;

• Energy conservation;

• Weatherization;

• Utility hook-ups;

• Lead abatement work;

• Paint programs; or

• Emergency repairs.

HOME is not generally used for minor or specialty

repair programs unless they are a part of bringing

overall units up to applicable codes and standards. The

HOME Program requirements stipulate that each unit

rehabilitated with HOME funds must meet all

applicable state and local housing codes, or other

applicable codes. In addition, HOME has a minimum

investment threshold of an average of $1,000 per

HOME-assisted unit in a project. CDBG funds can be

used to assist the full range of specialty and minor

repair programs and it has no minimum investment

requirement. In addition, CDBG has no requirement

that units meet code upon completion of the

rehabilitation, although this is sometimes required by

grantees.

Example: Special Purpose Program

The City of Glen Allen has a large percentage of elderly

persons in its community. Many of these elderly persons

have aged in place in their existing homes. Yet, these homes

have not been updated to accommodate the seniors’ needs—

such as accessible bathrooms, kitchens and entryways.

While the City would like to be able to fully rehabilitate all

substandard homes in its community, it does not have the

resources. So, the City uses its CDBG funds to develop a

handicapped accessibility rehabilitation program. Under this

program, any low-income elderly or disabled household can

apply for up to $5,000 of assistance to enhance the

accessibility of their home.

Moderate/Substantial Rehabilitation

When a unit requires moderate or substantial

rehabilitation, significant repairs are made to the home.

This may include simply rehabilitating all items that do

not meet code or it may involve what is sometimes

called “whole house rehabilitation,” meaning

HOME and CDBG

undertaking substantial repairs throughout the home in

order to bring it up to code and to improve the overall

livability and functionality of the unit.

HOME funds can be used to finance substantial

rehabilitation activities. PJs must ensure that the

HOME investment in the rehabilitation does not

exceed the maximum per unit subsidy limits. As noted

in Chapter 1 of this guide, these limits are set at the

221(d)(3) limits for the community and may be

obtained by contacting the HUD Field Office or online

on the HOME Program website at

http://www.hud.gov/offices/cpd/affordablehousing/programs/

home/limits/subsidylimits.cfm. Generally, these limits are

fairly generous and it is highly unlikely that most

rehabilitation projects will exceed these limits.

PJs must also ensure that the post-rehabilitation value

of properties does not exceed the maximum value limit.

The after-rehabilitation value may not exceed 95

percent of the median purchase price for the area.

There are two methods for determining this cap:

• Using the 203(b) limits as published by HUD, or,

• As determined locally through market analysis.

The maximum purchase price/after-rehabilitation value

limits are available online at

http://www.hud.gov/offices/cpd/affordablehousing/programs/

home/limits/maxprice.cfm.

To establish HOME project eligibility, after-

rehabilitation value must be established prior to any

work being performed. Any one or more of the

following methods may be used to establish the after-

rehabilitation value:

• Estimates of value. The PJ or subrecipient can

prepare estimates of value. Project files must

contain the estimate of value and document the

basis for the value estimates.

• Appraisals. A licensed fee appraiser or a staff

appraiser of the PJ can prepare an appraisal. Project

files must document the appraised value and the

appraisal approach used.

• Tax assessments. Tax assessments for a

comparable property located in the same

neighborhood may be used to establish the after-

rehabilitation value if the assessment is current and

accurately reflects market value after rehabilitation.

The CDBG Program can also be used to conduct

moderate and substantial rehabilitation. CDBG is not

subject to a maximum value or maximum per unit

investment cap. However, all costs must be reasonable.

Reconstruction

Reconstruction involves demolishing an existing

residential unit and rebuilding another on the same site.

Often, reconstruction occurs because the cost of

rehabilitation is prohibitive or is more than the cost to

build a new unit.

A reconstructed HOME unit is essentially demolished

and rebuilt. HOME may be used for reconstruction

when:

• There is an existing building on the site that will

not, as determined by the PJ, be rehabilitated. The

existing housing must be standing at the time of

project commitment; and

• The number of dwelling units will remain constant.

Note that the number of bedrooms per unit may

change; and

• The new unit will be located somewhere on the

same lot. It is no longer required that the new unit

be located on the same foundation footprint as the

existing unit.

Reconstruction is a fairly new eligible activity for

CDBG and although it is currently permitted by

statute, it is not yet incorporated into the CDBG

regulations. Grantees may refer to the HOME Program

definition of reconstruction as a “safe harbor.”

• Reconstruction means rebuilding a housing unit on

the same lot. Under CDBG, it is acceptable if the

existing home is not standing at the time of CDBG

project commitment but it must have been on the

site within a reasonable timeframe from when the

project was initiated.

• CDBG does not require that the grantee itself

undertake the demolition of the existing unit. The

homeowner can undertake this demolition, or it

may be the result of accidental means (such as a

fire).

• The number of housing units on the lot can not be

decreased or increased as part of reconstruction,

however, the number of rooms may be decreased or

increased.

• Reconstruction includes replacing an existing

substandard manufactured housing unit or stick-

HOME and CDBG

built home with a new or standard manufactured

housing unit.

• Reconstruction does not include demolishing a non-

residential structure and constructing residential

units. This would be new construction and while

the demolition would be eligible, the new

construction would not, unless undertaken by a

CBDO.

Under the State CDBG program regulations, states are

given the ability to interpret the list of eligible activities

in the Housing and Community Development Act

(HCDA), providing their interpretations are not plainly

inconsistent with the HCDA. The HCDA lists

reconstruction of buildings as an eligible activity, but

does not further define “reconstruction.” States may

use the Entitlement program eligibility policy as

interpretive guidance.

Note that reconstruction under either CDBG or

HOME is treated as rehabilitation for the purposes of

program compliance. However, reconstruction is

treated as new construction for the purposes of

conducting an environmental review.

Example: Reconstruction

The State of Lincoln has a number of owner-occupied

homes that are significantly decayed. The state is concerned

about the health and safety of the occupants.

It uses its HOME funds to set up a program where these

low-income households can receive reconstruction

assistance. The program is run by a state-wide, faith-based,

nonprofit subrecipient. This subrecipient takes the

applications and processes the HOME funding.

Households can receive assistance to demolish their existing

unit. In order to keep costs low, the subrecipient works with

the household to select a new factory-built and locally-

installed manufactured home to be placed on the site. This

approach is less expensive than new construction and the

new units can be occupied more rapidly.

Historic Preservation

Historic preservation involves rehabilitating structures

within the community that are determined to be

“historic.” Often, people think of historic

preservation as addressing commercial and public

facilities. While this type of preservation is indeed

eligible under CDBG, the activity can also include

historic preservation of residential structures, including

single family homes.

Both HOME and CDBG funds can be used to

preserve residential buildings of an historic nature in

the community, although there are some important

differences in how funds from either program can be

used.

HOME does not have a specific eligibility category

entitled “historic preservation.” Historic preservation

as a stand-alone activity does not constitute an eligible

use of HOME funds unless the activity in question is

for the express purpose of providing one or more units

of affordable housing. In other words, since HOME

funds must be used solely for the development of

affordable housing, the preservation of any historic

structure must be incidental to the rehabilitation of an

affordable housing unit. These units would still be

subject to all of the HOME rules regarding

rehabilitation.

CDBG funds may be used for the rehabilitation,

preservation, or restoration of historic properties,

whether publicly- or privately-owned with the

exception of buildings for the general conduct of

government. CDBG can pay for some or all of the

repairs related to the historic preservation or other

rehabilitation of the unit.

Eligible historic properties for CDBG rehabilitation

include:

• Properties listed or eligible to be listed in the

National Register of Historic Places;

• Properties listed in a state or local inventory of

historic places; or

• Properties designated as a state or local landmark or

historic district by law or ordinance.

Jurisdictions that are considering undertaking historic

preservation must work closely with their state or local

historic preservation office. Often, these offices have

rules and requirements related to the type of work that

may be undertaken on an historic structure.

Lead-based Paint Hazard Evaluation

and Reduction

Programs that are designed specifically to address lead-

based paint in homes can be administered as a part of

other rehabilitation activities or can stand alone as

separate programs.

Both HOME and CDBG funds can be used to cover

the costs of evaluating and treating lead-based paint.

Removal or treatment of lead paint may be undertaken

HOME and CDBG

as a homeowner rehabilitation activity. Under HOME,

however, rehabilitation of these units must still follow

all of the rehabilitation requirements. Therefore, the

unit must be brought up to code and the

minimum/maximum subsidy and maximum property

value limits must be applied.

Under CDBG, lead paint testing and abatement is a

stand-alone rehabilitation activity and it can be

undertaken as an activity or as a part of other

rehabilitation work.

HUD’s consolidated lead-based paint regulations at 24

CFR Part 35 call for jurisdictions to adhere to specific

actions when addressing lead-based paint in association

with rehabilitation activities. Lead-based paint activity

thresholds are based on the lesser of the per unit

rehabilitation hard costs (excluding lead-based paint

work) or the total amount of Federal assistance in a

project.

• When this amount is less than $5,000 per unit, a

jurisdiction must “do no harm.” That is, the

jurisdiction must conduct mild lead hazard

evaluation and lead hazard reduction.

• When this amount is between $5,000 and $25,000

per unit, jurisdictions must “identify and control

lead hazards.” That is, the jurisdiction must

conduct a moderate level of lead hazard evaluation

and lead hazard reduction.

• When this amount is greater than $25,000 per unit,

a jurisdiction must “identify and abate lead

hazards.” That is, the jurisdiction must undertake

the highest level of lead hazard evaluation and lead

hazard reduction.

Notification and disclosure requirements apply to each

level of lead hazard reduction. Ongoing maintenance

of lead-based paint units is required only in the case of

HOME-assisted multifamily units.

More information about HUD’s lead-based paint

policies and requirements is available online at:

http://www.hud.gov/offices/lead/.

Code Enforcement

Code enforcement programs are designed to inspect

and evaluate housing quality within a jurisdiction.

Often, communities have code enforcement divisions

whose job is to assess and cite dilapidated structures.

Both HOME and CDBG funds can be used to inspect

residential properties for property standard compliance.

HOME funds cannot be used, however, to fund a

stand-alone code enforcement program. HOME

property inspections must be related to the provision

of affordable housing. However, HOME can be used

to rehabilitate homes that have been cited by code

inspectors. If HOME is tied to the code enforcement

process, the PJ needs to ensure that all rehabilitation

meets the HOME requirements, including household

income eligibility, rehabilitation standards,

minimum/maximum per unit investment, maximum

value, and all other applicable requirements.

CDBG can be used to fund a stand-alone code

enforcement program. Eligible code enforcement

costs under the CDBG Program include:

• Salaries and other expenses related to code

enforcement activity; and

• Costs of legal proceedings related to code

enforcement activity.

CDBG-funded code enforcement must be undertaken

in deteriorated or deteriorating neighborhoods and

cannot be undertaken on a city-wide basis unless the

entire community qualifies as deteriorated. In addition,

there must be public or private investment that is

planned or ongoing in the code enforcement area that

may be expected to arrest the decline of the

neighborhood. CDBG need not be funding the

improvements, rehabilitation, or services but they must

clearly be occurring within the code enforcement area.

Example: Code Enforcement: The Town of Devon

has two neighborhoods that are significantly deteriorated.

The Town has tried a range of voluntary programs, but as yet

has been unable to see a substantial improvement. Both

neighborhoods consist primarily of low-income owner-

occupied homes. So, the Town undertakes a two -pronged

initiative in the areas. First, the Town uses its CDBG funds

to pay for code enforcement inspectors to evaluate and cite

units within these neighborhoods. Then, the Town offers

HOME rehabilitation funds to any low-income homeowner

to assist them to bring their unit up to code. The result is a

significant increase in the number of decent, safe, and

sanitary units in these neighborhoods.

HOME and CDBG

The CDBG rule prohibits the use of CDBG funds to

correct property code violations as a code enforcement

activity. However, these corrections can be done as a

rehabilitation activity, including homeowner

rehabilitation.

Home-based Business Rehabilitation

In many low-income neighborhoods, home-based

businesses are common. Examples might include hair

salons, tax or accounting services, or day care. In many

of these businesses, the business is run out of the same

rooms of the home that are used by the family. For

example, the basement may serve as the day care

center’s indoor play room during the day and the

family’s TV area at night.

Under the CDBG rule, program funds can be used to

make improvements to single family residential

properties that also serve as places of business. Even if

the rehabilitation work is necessary in order to operate

the business, the activity need not be considered to be

rehabilitation of a commercial or industrial building if

the improvements also provide general benefit to the

residential occupants of the building.

The standard under the HOME rule is different,

however. Homeowner rehabilitation assistance can be

provided to an income-eligible homeowner whose

business is also located in the housing unit if the

primary purpose of the activity is to rehabilitate the

residence and bring it up to code. Improvements that

accrue to the business located in the home are

allowable under HOME only so long as the

improvements are incidental to the rehabilitation of the

residence. Home-based business rehabilitation is not

an eligible stand-alone activity under the HOME

Program.

Financing and Undertaking

Homeowner Rehabilitation

This section highlights the rules related to financing

and managing homeowner rehabilitation programs. It

describes the partners who are typically involved in

such programs, the various financing tools, eligible

costs, property standards, homeowner incomes, and

other Federal requirements.

Partners

There is a wide range of roles that can be played by

partners in a homeowner rehabilitation program,

including:

• A nonprofit or other public agency may act as a

jurisdiction’s subrecipient and manage a

homeowner rehabilitation program on behalf of the

community.

• A partner may take on a limited administrative role

for the jurisdiction, such as marketing the program

in the neighborhood, or helping the jurisdiction

translate materials into the language spoken by

neighborhood residents.

• A partner may act as a community advocate or

advisory group.

• A partner may provide counseling to owners on

behalf of the jurisdiction on topics such as home

repairs and maintenance.

It is important to note that homeowner rehabilitation is

not an eligible CHDO set-aside activity because it does

not involve the development, ownership or

sponsorship of units (since these units are already

owned by the homeowner).

Forms of Financial Assistance

This section highlights the various forms of financing

that are common in homeowner rehabilitation projects.

It also notes special provisions in CDBG for escrow

accounts and lump sum draw downs.

Financial Tools. There is a wide range of options for

structuring owner-occupied rehabilitation assistance.

Homeowner rehabilitation programs and jurisdictions

may choose to finance all of the rehabilitation cost or

only a portion of the cost. Some common financial

tools include:

• Grants. A grant is often necessary to provide the

deep subsidy required by very low-income

participants of rehabilitation programs. Grant

assistance can be used to directly subsidize the cost

of rehabilitation, or to write down the principal

amount of a private loan, thus making the monthly

loan affordable to the homeowner. The latter

technique is often referred to as principal reduction.

HOME and CDBG

• Deferred payment loans. Like grants, deferred

payment loans are often used to provide deep

subsidies to very low-income households. These

are non-amortizing loans that are not repaid until

some future point in time. Many jurisdictions

structure these loans to be repaid upon sale of the

property.

• Forgivable loans. Forgivable loans are non-

amortizing loans that are typically structured so that

a portion of the loan is forgiven over time.

Generally, jurisdictions forgive a pro-rated share of

the loan based on how long the owner has resided

in the property. If the owner sells the property

before the end of the loan term, then he or she

would only repay the amount not yet forgiven. For

instance, if the jurisdiction loans $20,000 as a ten-

year forgivable loan, then each year, $2,000 would

be forgiven. If the owner sells the property in year

five, he or she would repay $10,000 to the

jurisdiction.

• Amortizing loans. These are loans that require a

monthly payment by the homeowner. When

participants are able to afford monthly payments,

lending funds makes sense because funds that are

repaid can be reinvested to assist other low-income

households. Amortizing loans can be made as

principal-only loans, or funds may be lent at below-

market interest rates.

If the jurisdiction chooses to finance only a part of the

rehabilitation cost, it may structure its loans to be used

in combination with other financing. For example, the

jurisdiction and a private lender could jointly loan the

funds needed for rehabilitation. The homeowner

would secure one loan from the private lender and a

second loan (known as a “soft second”) from the

jurisdiction, usually as a deferred payment loan or one

at below-market interest rate. The amount of the soft

second loan is often established as the difference

between the cost of rehabilitation and the amount of

private loan the homeowner is able to secure. This

loan is subordinate to the private lender’s.

There are several other less common forms of financial

assistance that may be used in homeowner

rehabilitation programs. These forms include interest

subsidies and loan guarantees. Both methods enable

jurisdictions to use small amounts of Federal funds to

leverage private money for rehabilitation.

• Interest subsidies. Interest subsidies, also referred

to as interest reduction grants or interest rate buy-

downs, are similar to principal reduction grants or

loans except that the HOME or CDBG funds are

used to “buy down” the interest rate to an

affordable level. In this case, the HOME or CDBG

subsidy is paid directly to the lender and not

provided to the homeowner.

• Loan guarantees. Loan guarantees are another

way to leverage HOME or CDBG funds for

homeowner rehabilitation. A loan guarantee can be

used as a credit enhancement when a borrower

otherwise eligible for a private loan is denied

because of a real or perceived risk factor. In these

cases, the jurisdiction could provide a loan

guarantee that would ensure payment to the lender,

thereby making the loan acceptable. If the

jurisdiction plans to use loan guarantees for a large

number of loans, it can capitalize a loan guarantee

account with HOME funds. The amount of

HOME funds in such accounts must be based on a

reasonable estimate of the default rate on the loans

guaranteed, and may not exceed 20 percent of the

total outstanding principal guaranteed.

CDBG cannot be used to capitalize a loan guarantee

account but it can be used for individual loan

guarantees. To do this, the grantee generally retains

the funds in its line of credit, to be available in the

event of default unless the grantee can justify a

drawdown in advance of need because no financial

institution will participate based only on a payment

guarantee with no funds on deposit. Further, any

amount deposited as a guarantee must be

reasonable—that is, the minimum amount necessary

to cover anticipated defaults.

Refinancing. On occasion, a jurisdiction finds it

necessary to assist a homeowner to refinance existing

debt in order for an assisted property to remain

affordable to the homeowner, or in the case of

multifamily housing, the tenant(s). HOME and CDBG

can be used to cover the cost of refinancing existing

debt.

HOME can be used when the refinancing is secured by

housing that is being rehabilitated with HOME funds

under the following conditions:

• When HOME funds are used to rehabilitate single

family (1-to-4 unit) owner-occupied housing; and

• HOME funds are loaned for rehabilitation; and

HOME and CDBG

• Refinancing allows the borrower’s overall housing

costs to be reduced and the housing is made more

affordable.

Loans for refinancing existing debt secured by the

property to be rehabilitated are eligible under CDBG if

the grantee determines that this type of assistance is

necessary to achieve local community development

objectives. As under HOME, this refinance must be

part of a rehabilitation project, to make the

rehabilitation affordable—CDBG does not permit

refinance-only projects.

Refinancing eligible owner-occupants’ secured debt has

several implications.

• Refinancing makes overall housing costs, including

rehabilitation costs, affordable to the owner.

• Refinancing will reduce the amount of funds

available to other applicants, thereby reducing the

number of families that can be assisted.

Example: Refinancing

Mr. and Mrs. Brown are seeking HOME funds to rehabilitate

their home. They have an outstanding principal balance on

their first mortgage of $40,000, at 10 percent interest, with a

monthly payment of $386. The cost of rehabilitation is

$15,000. The PJ is offering the rehabilitation loan at 3

percent for a 20-year term, with a monthly cost of $83.19.

The monthly payments for both loans total $469.19. Because

the Browns are on a fixed income, the increased mortgage

cost would create a financial burden, requiring them to pay

well above 30 percent of their monthly income for rent.

Refinancing the first mortgage along with the rehabilitation

costs using HOME funds would allow them to finance the

total $55,000 debt at 3 percent interest for 20 years. This

results in a monthly cost of $305.03, a savings of $164.16 per

month, making the rehabilitation possible for the Browns

and substantially lowering their monthly housing-related

expenses.

Escrow Accounts. Some grantees have difficulty

making timely payments to contractors from their

CDBG accounts, discouraging private businesses from

participating in CDBG rehabilitation activities. In

order to address this difficulty, HUD permits CDBG

grantees to use program funds to establish escrow

accounts for the purpose of making timely payments to

program participants. The use of escrow accounts is

limited to loans and grants for the rehabilitation of

primarily residential properties containing no more

than four dwelling units (and accessory neighborhood-

scale, non-residential space within the same structure, if

any, such as a store front below a dwelling unit).

Requirements include:

• The contract between the property owner and

contractor must specifically provide for the use of

an escrow account;

• Account funds are only used for residential

rehabilitation activities;

• Account is limited to the amount expected to be

disbursed within ten working days;

• Interest earned on the account is to be returned to

HUD, at least quarterly; and

• Funds in the escrow account may only pay for

actual costs of rehabilitation.

Note, there are no state CDBG requirements for

escrow accounts. States may use the entitlement

regulations as interpretive guidance.

Lump Sum Drawdowns.

CDBG grantees may draw

funds from the letter of credit in a lump sum to

establish a rehabilitation fund in one or more private

financial institutions for the purpose of financing the

rehabilitation of privately-owned properties. The fund

may be used in conjunction with various rehabilitation

financing techniques, including:

• Loans;

• Interest subsidies;

• Loan guarantees;

• Loan reserves; or

• Other HUD-approved uses that are consistent with

the objectives of the CDBG program.

The fund may also be used for making grants, but only

for the purpose of leveraging non-CDBG funds for the

rehabilitation of the same property.

Requirements include:

• Written agreement with financial institution(s), with

a term lasting no longer than two years.

• Use of the deposited funds must begin within 45

days of the initial drawdown and deposit.

Substantial disbursements must occur from the

fund within 180 days of its establishment.

• The grantee is responsible for annual review of

activity progress.

HOME and CDBG

• The grantee shall terminate the written agreement(s)

with financial institution(s) and return all unused

funds to letter of credit in the event that there is a

substantial failure on the part of the financial

institution(s) to live up to the terms of the written

agreement. The grantee must provide HUD and

the institution(s) in question with written

justification for these actions.

• All unused and unobligated funds shall be returned

to the grantee’s letter of credit at the end of the

term of the agreement, unless the grantee renews

the agreement with the financial institution(s).

• When drawdown funds are used to provide a loan

guarantee for private or other non-CDBG financed

loans issued to finance rehabilitation activities, these

are considered to be CDBG projects, and as such

are subject to CDBG requirements.

• Program income (interest, loan repayments) earned

through the drawdown account is to be used to

finance other CDBG-eligible rehabilitation

activities.

Eligible Costs

In general, there are three types of costs for

homeowner programs:

• Activity costs;

• Program or activity delivery costs; and

• Home maintenance or other related housing

counseling costs.

Activity Costs. Under HOME and CDBG, both the

actual cost of rehabilitating the housing and related soft

costs are eligible. Table 4-1 lays out the specific eligible

costs under a homeowner rehabilitation program.

Table 4-1: Eligible Homeowner Rehabilitation Costs

HARD COSTS

• Meeting the rehabilitation standards

• Meeting applicable codes, standards, and ordinances

• Essential improvements

• Energy-related improvements

• Lead-based paint hazard reduction*

• Accessibility for disabled persons

• Repair or replacement of major housing systems

• Incipient repairs and general property improvements

of a non-luxury nature

• Utility connections

SOFT COSTS

• Financing fees

• Credit reports

• Title binders and insurance

• Recordation fees, transaction taxes

• Legal and accounting fees

• Appraisals

• Architectural/engineering fees, including specifications

and job progress inspections

• Refinancing of existing debt, secured by the property,

if the housing is owner-occupied and refinancing

allows the overall costs of borrower to be reduced and

the housing is made more affordable

* Note: Lead hazard reduction costs are not counted as hard costs for the purposes of determining the level of

assistance under 24 CFR Part 35 (the Lead Safe Housing Rule).

The purchase of construction equipment is generally

ineligible under both HOME and CDBG. However,

the purchase of tools to be used as part of a “tool

lending” rehabilitation program is eligible under

CDBG. Compensation for the use of construction

equipment through leasing, depreciation, or other use

allowances (described in applicable OMB Circulars) is

allowable, provided the activity is otherwise eligible.

CDBG also allows some specific types of other soft

costs, including:

• Initial homeowner warranty premium;

• Hazard insurance premium (except when the

assistance is in the form of a grant);

• Flood insurance premium; and

• Inspection and testing for lead-based paint.

Program or Activity Delivery Costs. Program or

activity delivery costs are those jurisdiction or

subrecipient costs necessary to delivering the

homeowner program, such as inspections,

specifications writing, underwriting, and other project

costs, including loan servicing, that are incurred by the

jurisdiction and are directly related to a specific project.

HOME and CDBG

As noted in the previous chapter, CDBG and HOME

handle program delivery costs differently. Under

CDBG, costs for delivery are covered under the project

activity and are not counted toward the administrative

cap.

Under HOME, this type of cost can be charged to the

project when the cost is directly attributable to the

specific project. The jurisdiction must track the costs

to specific units and must include these costs within the

maximum per unit subsidy limit. If the costs cannot be

attributed to a specific project, they must be counted as

administrative. As noted in the previous chapter,

CDBG can pay for program delivery costs for HOME

projects, including tasks such as energy auditing, work

specifications, loan processing, or inspections. Since

these are eligible costs under 24 CFR 570.201(k) as a

housing service, they do not count toward the

jurisdiction’s CDBG administrative cap.

Maintenance or Other Counseling. People often

think of housing counseling as only being related to

new homebuyers. However, counseling can be an

important part of a homeowner rehabilitation program.

In some instances, homeowners do not understand

how to keep up their homes. Without proper

maintenance, the benefits of the rehabilitation may be

short-lived. Other homeowners may not be aware of

key tips and techniques for budgeting and as a result

they may find themselves unable to repay a

rehabilitation loan.

Typical types of homeowner counseling include:

• Maintenance counseling. These courses focus on

basic repairs and up-keep items such as changing

furnace filters, regular maintenance of heating or

septic systems, or weatherization tips; or

• Budgeting and finance. These courses assist the

owner to manage his or her finances so that the bills

get paid.

Homeowner counseling is generally an eligible cost

under HOME, if the counseled homeowner resides in a

HOME-assisted unit. If the homeowner does not end

up receiving assistance, or if PJ records are not able to

clearly assign these costs to individual units, the costs

must be charged to administration.

Grantees have several options for how to set up

counseling programs under CDBG. The three most

common options are:

• HOME housing services. Grantees might use

CDBG to pay for housing counseling related to a

HOME homeowner rehabilitation program.

• Public service. Grantees can set up housing

counseling programs as a public service activity.

These costs will count towards the grantee’s 15

percent cap on public service expenditures.

• Program delivery for CDBG. Grantees can fund

housing counseling as part of a CDBG-funded

homeowner rehabilitation activity as a program

delivery cost. Under this option, the grantee offers

housing-related counseling as part of its

rehabilitation assistance program and the costs of

the counseling are included in the cost of the

program.

Property and Rehabilitation Standards

As noted previously, HOME and CDBG differ in the

application of property standards. CDBG does not

mandate that units be brought up to code and does not

apply a particular property standard. HUD

recommends that CDBG grantees establish written

property standards for units assisted with program

funds to ensure that work is completed within local or

state codes. Grantees are encouraged to develop

guidelines for property standards and codes with CPD

staff at the local HUD Field Office.

Under the HOME regulations, housing units assisted

with HOME funds must meet all applicable state and

local property standards, or other standards. In order

to meet all applicable property standards, HOME

requires that a PJ establish written rehabilitation

standards for housing units that it rehabilitates with

HOME. The written rehabilitation standards provide

the means by which applicable property standards are

met. A written rehabilitation standard defines the

quality of the housing and the materials that will be

used, such as specifying the type of nails to be used, the

distribution of roofing tiles, or the grade of lumber to

be used. Establishing such standards helps ensure that

assisted units are of adequate workmanship, there is

consistency among assisted rehabilitation jobs, and

there is a common standard against which local

contractors can base their bids.

HOME and CDBG

Initial Owner Incomes

HOME and CDBG take somewhat different

approaches to applicant income when it comes to

rehabilitation. Under HOME, all households must be

income eligible when the HOME rehabilitation

assistance is provided. This means that all assisted

households must be at or below 80 percent of the area

median income, adjusted for household size.

With CDBG, depending on which national objective is

being met, there are circumstances when each

individual homeowner may or may not need to be low-

income. When a homeowner rehabilitation program is

undertaken to meet the low- or moderate-income

housing national objective, every homeowner needs to

be low- or moderate-income. In fact, no other low-

and moderate-income national objective may be used

for homeowner rehabilitation. Homeowner

rehabilitation cannot be undertaken under the low- and

moderate-income area benefit or limited clientele

objectives. The statute is very clear that housing

activities—if counted as a low- and moderate-income

activity—must be undertaken under the housing

national objective.

However, CDBG homeowner rehabilitation can be

funded to meet a different national objective. For

example, if the home is located in a designated blighted

area, rehabilitation may be undertaken, regardless of the

income of the owner, as long as it addresses conditions

that contributed to the deterioration of the area. The

CDBG rules stipulate that for residential rehabilitation

under the area slum blight national objective, all code

items must be undertaken before paying for less critical

items.

If the home itself is blighted (but not necessarily

located in a blighted area), the spot slum/blight

national objective may be used and the income of the

owner would be irrelevant. In this instance, the

rehabilitation would be limited to items that are a

health and safety hazard to the public. It is important

to note that this does not mean that the item is a

hazard to the individual but rather to the public at

large. So, if an individual homeowner needs a

handicapped accessibility ramp, it is not eligible because

it is not a public health hazard. If the façade of a home

is imminently going to fall down, with the risk of

striking pedestrians on the sidewalk, it would be a

public safety issue. Note that historic preservation may

also be undertaken under spot blight national objective

and it is not subject to the rules regarding the type of

rehabilitation that can be undertaken, but rather is

limited to work determined to contribute to the

conservation and preservation of the structure being

assisted.

CDBG also provides regulatory flexibility to support of

neighborhood revitalization strategies. This flexibility

is extended to both activities funded through

Community Development Financial Institutions

(CDFIs) and Neighborhood Revitalization Strategy

Areas (NRSAs) or Community Revitalization Strategy

Areas (CRSAs).

CDFIs were created under the Community

Development Banking and Financial Institutions Act of

1994. CDFIs are community lenders that:

• Are primarily dedicated to the promotion of

community development;

• Serve an investment area or targeted population;

• Provide development services and equity

investments or loans; and

• Maintain accountability to residents within the

specified investment area; and

• Are not public agencies or institutions.

CDBG grantees also have the option to develop

specific Neighborhood Revitalization Strategy Areas

that target program resources or specific areas within

the community. States may adopt CRSAs. Regulations

authorizing the development of NRSAs and CRSAs

were published by HUD on January 5, 1995, and

require grantees to submit NRSAs or CRSAs as either

part of an original Consolidated Plan submission, or as

an amendment to a previously approved Consolidated

Plan (see 24 CFR 91.505).

If a CFDI is working with CDBG in a targeted low- or

moderate-income neighborhood or if the grantee has

an adopted NRSA or CRSA, the grantee is allowed to

add up all of the CDBG units for which funds are

obligated in the area in a given program year, and treat

them as a single structure. Then, 51 percent of these

units must be occupied by households that are low- or

moderate-income. This is called creating a “virtual

project” and it allows the grantee to fund some

homeowner rehabilitation and rental units (49 percent)

that are occupied by households that are not low- or

moderate-income. This can further a grantee’s goals

for mixed-income development.

HOME and CDBG

If the 51 percent test is met at the end of the program

year, these activities are deemed to have met the low-

and moderate-income housing national objective.

Note, however, that only the portion of the costs that

are used to assist low- or moderate-income persons can

be counted toward the grantee’s required overall

program goal of 70 percent expenditure on low- or

moderate-income activities.

HOME PJs and CDBG entitlement grantees have the

option to choose one of three accepted methods for

calculating household income. States may choose one

of the following definitions or their own income

definition.

• Part 5 definition of income (24 CFR Part 5.609);

• Census long form definition of income; or

• IRS 1040 definition of income.

CDBG grantees that elect to use the Part 5 definition

of income may exclude the value of a homeowner’s

primary residence from any calculation of net family

assets if the homeowner is receiving CDBG

rehabilitation assistance.

Other Federal Requirements

There are a number of other Federal requirements that

are applicable to homeowner rehabilitation programs.

Jurisdictions are encouraged to review the applicable

regulations and HUD guidance.

HOME and CDBG

Chapter 5:

Using HOME and CDBG for Comprehensive

Neighborhood Revitalization

For some declining neighborhoods, an investment of housing or economic development dollars alone will not be sufficient to make a

sustainable improvement to the neighborhood. For these neighborhoods, the only viable option for creating a healthy neighborhood is

to address a number of neighborhood challenges in a comprehensive way. This chapter explores how to use CDBG and HOME

funds to tackle a broad range of neighborhood revitalization activities, including housing, commercial development, infrastructure,

transportation, schools, and law enforcement.

Approaches to

Neighborhood

Revitalization

In many circumstances, an investment of CDBG or

HOME funds can correct a single blighting influence,

generate a certain number of affordable housing units,

or create infrastructure to serve basic needs of a

neighborhood or community. For declining

neighborhoods, however, these types of single

investments are not usually sufficient to turn the

neighborhood around. For instance, a large investment

in housing may attract new buyers or tenants initially,

but without safe streets, viable schools, or a healthy

commercial district nearby to support the residents, the

interest in the neighborhood will not be sustained.

Declining neighborhoods require comprehensive

revitalization strategies that capitalize on the

neighborhood’s assets and address its challenges.

Successful neighborhood revitalization initiatives start

with a sound redevelopment plan. The planning

process is used to bring the neighborhood’s

stakeholders together, with the specific purpose of

analyzing the market dynamics in the neighborhood,

and identifying its assets and challenges. The planning

process results in a vision of the neighborhood in the

future that is shared by most stakeholders. Once the

vision is clear, it can guide all subsequent decisions

about redeveloping the neighborhood’s physical

infrastructure (housing, commercial buildings,

transportation, and other public infrastructure), and its

service coordination and delivery. Many neighborhood

revitalization activities will be eligible activities under

either HOME or CDBG.

Planning Models for Urban

Redevelopment

The redevelopment planning process usually results in

a document or tool, such as a land use plan, that maps

out what types of development (residential,

commercial, industrial, open space) are appropriate for

the neighborhood, and where that development will

occur. In the past decade, new planning models have

evolved that can help urban neighborhoods articulate a

vision that promotes the best assets of the

neighborhood, while controlling or minimizing the

negative impacts of growth and development. These

planning models define the principles that are

incorporated into the design of the neighborhood.

These concepts are compatible and share common

features, although each emphasizes somewhat different

goals.

• New Urbanism

New Urbanism is the most

commonly known of the recent urban planning

concepts. The concept evolved in the 1990s and

draws on the positive features of neotraditional

planning movement. New Urbanism emphasizes

walkability, diversity, and quality of life. Walkable

communities are dense, mixed-use neighborhoods

that are interconnected by pedestrian walkways.

Ideally, residents would be able to walk to most

activities of daily living. The neighborhood would

also be supported by a range of transportation

options. New Urbanism promotes diverse

neighborhoods with a mix of activities, and

therefore land uses. At a minimum, this would

include retail or commercial and residential uses.

Residential housing would be designed and priced

to serve a range of households and a mix of

incomes. Finally, the design would promote quality

of life, including quality architecture and urban

HOME and CDBG

design, to promote a sense of place; and design

features would encourage neighborly interaction

and sociability.

• Smart Growth. While New Urbanism focuses on

maximizing the positive aspects of a traditional

urban neighborhood, the smart growth movement

evolved from the need to control the negative

impacts of growth. Smart Growth typically refers

to public policies that are implemented in order to

use resources wisely and efficiently, and to control

the negative aspects of growth in a neighborhood.

Smart Growth is highly compatible with New

Urbanism. It promotes energy efficiency, economic

efficiency, and environmental protections and

preservations. These principles result in planning

and design features that include walkability in the

neighborhood, and access to multiple transportation

options; neighborhood schools; community reuse

and revitalization; and preservation of farmland and

open space.

• Transit-Oriented Development. Transit-

Oriented Development also strives to mitigate the

impact of sprawl and develop livable communities

within urban cores. Public transit is one of the key

ways to increase the walkability of a neighborhood.

Increasing the investment in public transportation

systems can help lower residential transportation

costs. Transit-Oriented Development planning

models emphasize concentrating development

within a half-mile radius of bus and rail stations that

have frequent service. This results in high density,

mixed-use land uses, designed for pedestrian and

bicycle traffic.

The plan typically addresses how the physical

redevelopment of the neighborhood will occur. It

addresses the redevelopment of one or more of the

following components of the built environment:

housing, infrastructure (transportation, water and

stormwater, and utilities), commercial district, and/or

community facilities. In general, CDBG funds can be

used to finance a wide range of these revitalization

activities. HOME funds can be used only to fund the

affordable housing component of a neighborhood

revitalization initiative.

Housing Assistance

Previous chapters provide detail on how HOME and

CDBG can be used to support a range of affordable

housing activities. When revitalizing a neighborhood,

grantees and PJs need to determine what type of

housing activities will best support revitalization goals.

Many revitalization strategies are based on the premise

that an investment of public funds in a large-scale

housing development activity will spur private

investment. This can be an effective strategy because

its visual impact is immediate and substantial. Large

homeownership developments, in particular, have the

added benefit of creating a pool of stakeholders in the

neighborhood who will support continued

redevelopment. In developed neighborhoods,

however, land assembly can be difficult and costly,

particularly if there are a number of households or

businesses that must be relocated.

Investing public funds in substantial in-fill activity

throughout a neighborhood can be a less-expensive,

but equally effective strategy in neighborhoods where

large parcels of land are not available for assembly, and

where significant building infrastructure is occupied,

and/or in sound condition. Undertaking an in-fill

strategy does not have the same type of immediate,

visual impact of a large-scale new construction project,

but it can stabilize a community block-by-block.

Combining a vacant structure rehabilitation or

reconstruction program with a rehabilitation program

for existing homeowners on targeted blocks can be an

effective in-fill approach to revitalization. When

undertaking an in-fill strategy, or for neighborhoods

that have limited problems within the neighborhood,

CDBG or HOME can be targeted to specific blocks, or

even specific properties whose treatment will have a

high impact on the overall appearance of the

neighborhood.

Rental housing rehabilitation or development may play

a role in revitalizing neighborhoods with certain

housing markets. In neighborhoods with a high

proportion of homeowner housing, and in

neighborhoods with extremely high housing costs,

rental housing can offer housing opportunities for

households of all incomes. In neighborhoods with a

high proportion of affordable rental housing, increasing

the supply of this type of housing might not be

appropriate.

Property Inspections and Code

Enforcement

In addition to the development of additional units,

grantees and PJs may want to address the condition of

existing housing units in the target neighborhood.

HOME and CDBG

CDBG can be used to administer a code enforcement

program that involves inspecting properties in the

target area for compliance with applicable codes and

property standards. Under CDBG, code enforcement

is a separate eligible activity, and code enforcement

costs are not subject to the CDBG program’s 20

percent cap on planning and administrative expenses.

Eligible code enforcement costs under the CDBG

Program (24 CFR 570.202(c)) include:

• Salaries and other expenses related to code

enforcement activity; and

• Costs of legal proceedings related to code

enforcement activity.

General code enforcement activities are not eligible

under the HOME Program, although property

inspections of HOME-assisted units are eligible costs.

Every unit that is assisted with HOME funds must be

inspected to ensure that it meets applicable codes and

property standards upon completion. Property

inspections can be charged either as an eligible planning

and administrative cost (and subject to the PJ’s 10

percent cap on administrative expenses) or as a project

soft cost.

Once a code violation in a unit is identified, HOME

funds can be used to bring the unit up to code. CDBG

funds cannot be used under code enforcement to

correct property code violations (24 CFR 570.202(c)).

Note, correcting violations may be eligible under

CDBG as rehabilitation. Used together, CDBG and

HOME can help fund community efforts to uncover

and rectify residential property code violations and

restore dilapidated housing as standard, affordable

housing.

Infrastructure Development and

Improvement

Adequate infrastructure (i.e., public improvements) is

crucial to the successful revitalization of blighted and

impoverished neighborhoods. Although infrastructure

needs are sometimes taken for granted, they lay the

foundation for the community’s growth and

improvement. Redevelopment planning should include

an assessment of whether or not infrastructure systems

require upgrades. Basic infrastructure components

include:

• Transportation system, including streets, highways,

and bridges; parking; and sidewalks, to ensure that

people and goods are able to get in and around the

neighborhood with ease. The transportation system

is critical to the neighborhood’s local economy;

• Water, wastewater, and stormwater systems to

ensure that the neighborhood has a sufficient

supply of clean water, as well as a system for the

treatment of wastewater, and stormwater sewers to

prevent flooding;

• Electric and other utilities;

• Streetlights to make the neighborhood attractive

and safer; and

• Accessibility improvements required under the

Americans with Disabilities Act.

Since its creation in 1974, CDBG has been used

extensively to address infrastructure development

needs in communities throughout the country. CDBG

funds can be used by grantees and nonprofits for the

acquisition, construction, reconstruction, installation, or

repair of public infrastructure. The maintenance of

public infrastructure is not an eligible expense.

In general, HOME funds cannot be used to finance the

development or maintenance of public infrastructure.

However, it is an eligible HOME expense when it is

needed to support HOME-assisted housing and the

improvements to the project site are in keeping with

improvements of surrounding, standard projects.

Eligible infrastructure investments might include:

connecting housing that is assisted with HOME funds

to existing infrastructure (24 CFR 92.206(a)(3)); making

utility connections from the property line to the

adjacent street, including off-site connections;

developing on-site roads, sewer, and water lines

necessary to the development of the project; providing

essential infrastructure improvements to on-site

infrastructure. The project site is the property, owned

by the project owner, upon which the project is

located.

Economic Development

A vital urban neighborhood typically includes a healthy

residential living environment, and a healthy

commercial district. Neighborhoods rely on the

commercial district to provide needed goods and

services to support residents. CDBG grantees can

undertake a range of activities to support neighborhood

economic development.

CDBG can be used to provide assistance to create

economic opportunities that primarily benefit low- and

HOME and CDBG

moderate-income residents. Grantees have a great deal

of flexibility in how to use program funds to meet this

goal. Economic development activities that are eligible

under CDBG (24 CFR 570.203 and 570.201(o))

include:

• Acquiring, constructing, reconstructing,

rehabilitating, or installing commercial or industrial

buildings, structures, and other real property

equipment and improvements, including railroad

spurs and similar extensions;

• Assisting private, for-profit businesses;

• Providing economic development services in

connection with eligible economic development

activities;

• Providing financial and/or technical assistance,

advice, and business services to owners of

microenterprises and persons developing

microenterprises; and

• Training and technical assistance, or other support

services to increase the capacity of recipients or

subrecipients to carry out microenterprise activities.

Community Facilities and Public

Services

Community facilities (i.e., public facilities) add to the

quality of life for a community's residents. Integrating

quality services to meet the needs of residents and

businesses can generate opportunities for

neighborhood residents to develop ties to other people

in the community. These social benefits are often the

basis of a “sense of community” that makes a

neighborhood an attractive place to live. Community

facilities that may be eligible for assistance under the

CDBG program include senior and youth centers, child

care facilities, parks and recreational facilities,

community centers, fire stations, libraries, and health

care facilities.

Revitalizing neighborhoods must be supported by a

comprehensive strategy to deliver quality public

services, and a sustainable quality of life. Community

facilities often house important services to community

members, which include the following CDBG-eligible

public services:

• Employment and job training services;

• Crime prevention and community safety programs;

• Child care;

• Substance abuse treatment and counseling;

• Fair housing counseling;

• Energy conservation;

• Welfare services (other than direct income subsidy

payments);

• Recreational services;

• Meals on wheels and other programs to promote

nutrition; and

• Assisted living services.

In order to be eligible for CDBG funding, a public

service must either be a new service or a quantifiable

increase in the level of an existing service that has been

provided with funds from the unit of general local

government or the state. CDBG cannot be used to

replace existing local or State funding for a public

service. Grantees are capped on how much they can

spend on public services (see Chapter 1). Given the

importance of public services to community viability,

grantees should evaluate public service activities to see

if a particular service might qualify under a different

CDBG eligible activity category.

Financing and

Requirements for

Neighborhood

Revitalization

This section highlights the issues, rules, and

considerations that arise when managing a

neighborhood revitalization initiative. It describes the

partners that will help make a revitalization program

successful, identifies the financing considerations and

opportunities that are present when using HOME and

CDBG funds, and reviews the eligible costs applicable

to these activities.

Partners

Successfully turning around a declining neighborhood

will require more than an investment in the

development in the neighborhood—it will require a

change in how people perceive the neighborhood.

Buyers, renters, new businesses, and customers will not

be attracted to the neighborhood if they do not feel

safe, if the community school is failing, and if public

services are inadequate. Changing the perception of the

HOME and CDBG

neighborhood requires real change in the

neighborhood, and widespread publicity about that

change. In addition to the housing development

partners identified in prior chapters, the following

partnerships will be important:

Business leaders. Businesses in the neighborhood, as

well as in the surrounding community, will want to

support the revitalization effort because its success will

bring them new customers. Jurisdictions can call on

business leaders to hire neighborhood residents, lend

support to promote the commercial district, sponsor

community and promotional events, and help attract

new businesses to the neighborhood’s commercial

district.

Community institutions, such as universities and

colleges, hospitals, faith-based institutions. These

institutions are not able to relocate easily, and often

have a real stake in the success of the neighborhood.

They can provide outreach to their constituents to

promote changes in the neighborhood and market

availability of housing and other opportunities

generated as part of the revitalization plan.

Community residents, including civic associations,

homeowner associations, and tenant associations.

Resident participation in the community will be critical

to its success. Involving new and existing residents,

and creating opportunities for them to get to know one

another and work together for the future of the

neighborhood, can sometimes make the difference

between sustaining revitalization efforts over the long-

term, and seeing new redevelopment targeted by graffiti

and other crime. Community residents should be

involved early in the planning process and should

continue to be involved in the actual implementation

and evaluation of the revitalization effort.

Other state and local government agencies.

Housing agencies will need to reach out to other

agencies and work with them to improve the provision

of other public services in the neighborhood. Two key

areas are law enforcement and school districts, since

crime and poor quality schools will deter most new

buyers and businesses from investing in the

neighborhood.

The media. Real work to redevelop the

neighborhood’s housing stock, revitalize its commercial

district, make its streets safer, and improve the quality

of its schools will be for naught if the surrounding

community is unaware of the real and positive changes

occurring. Involving the media is key to publicizing the

successes of the revitalization effort, in order to attract

newcomers.

Note, some of the important partnerships in a

neighborhood revitalization initiative are not formal

ones, driven by program requirements. Nonetheless,

these relationships should not be overlooked, as they

can greatly enhance the revitalization effort.

Approaches to Financing

Two additional considerations should be made when

determining the most strategic approach to using

HOME and CDBG in combination to finance

neighborhood revitalization. The Section 108 Loan

Guarantee program provides CDBG grantees an

opportunity to finance large-scale physical development

projects over the course of more than one year. The

availability of regulatory flexibility in neighborhoods

that qualify as Neighborhood Revitalization Strategy

Areas generates an opportunity for grantees to attract

some households whose income exceeds the median

area income to the neighborhood, among other things.

Nothwithstanding the opportunities presented by these

resources, for many communities and projects, the

logical financial strategy, when approaching a

neighborhood revitalization initiative, will be to invest

HOME funds in the affordable housing component of

the initiative and CDBG funds in the non-housing

component. This section will review the eligible non-

housing costs under CDBG.

Section 108 Loan Guarantees. Loan guarantees made

through the Section 108 Program allow grantees to use

their CDBG funds to undertake large projects that are

often the cornerstone of revitalization efforts.

Grantees can apply for loans up to five times the

community’s current CDBG allocation to finance large-

scale projects, typically economic development

projects. The loans are financed through underwritten

public offerings. HUD requires grantees to provide

local collateral in addition to CDBG funds to secure

the loan. The size of the Section 108 loan sends a

HOME and CDBG

signal to private economic interests that the project in

question is worthy of investment, and as such serves as

an important leveraging tool. The loan repayment

period is up to 20 years.

In addition to (or in conjunction with) economic

development, Section 108 loan funds can be used to

finance:

• Acquisition of real property;

• Rehabilitation of publicly-owned real property

(except for structures that are primarily for the

general conduct of government);

• Housing rehabilitation that is CDBG-eligible;

• Construction, reconstruction, or installation of

public facilities;

• Related relocation, clearance, and site

improvements;

• Payment of interest on the guaranteed loan and

issuance costs of public offerings;

• Debt service reserves; and

• Public works and site improvements in Colonias.

It is important for grantees to consider when Section

108 funds, rather than annual CDBG allocations, will

be most appropriate to address economic development

needs. In general, Section 108 funds are best used for

large-scale development projects when other funding

sources are not available, and when the project has a

reasonably assured return on investment. Examples of

large-scale economic development projects can include:

• Neighborhood shopping centers;

• Grocery stores;

• Development of a mixed-use retail and housing

complexes;

• Industrial expansion; and

• Infrastructure development and improvement.

Community Development Financial Institutions

and Neighborhood Revitalization Strategy

Areas/Community Revitalization Strategy Areas.

CDBG allows for regulatory flexibility regarding

income targeting in order to allow grantees more

expansive use of program funds in order to support

neighborhood revitalization strategies. This flexibility

is extended to both activities funded through both

Community Development Financial Institutions

(CDFIs) and Neighborhood Revitalization Strategy

Areas (NRSAs) or Community Revitalization Strategy

Areas (CRSAs) for States.

A CDFI is a community lender that is primarily

dedicated to the promotion of community

development, and that serves a specific investment area

or targeted population. As lenders, CDFIs provide

development services and equity investments or loans,

and they maintain accountability to residents within the

specified investment area. CDFIs were created under

the Community Development Banking and Financial

Institutions Act of 1994, and cannot be public agencies

or institutions. Some typical CFDIs are community

development banks, community development loan

funds, microenterprise loan funds, or venture capital

organizations.

A CDBG grantee can create a NRSA for the purpose

of developing specific neighborhood revitalization

strategies to target program resources if the area meets

the demographic criteria to be so identified.

Regulations authorizing the development of NRSAs

and CRSAs were published by HUD on January 5,

1995, and require grantees to submit NRSAs or CRSAs

as either part of an original Consolidated Plan

submission or as an amendment to a previously

approved Consolidated Plan (see 24 CFR 91.505).

The regulatory flexibility that has been extended to

activities funded through either a CFDI

or an NRSA/

CRSA include:

• Area Benefit. Any job creation or job retention

activities undertaken pursuant to an NRSA or

CRSA strategy may meet the low- and moderate-

income area benefit national objective requirements

at 24 CFR 570.208(a)(1). This flexibility frees

employers receiving CDBG assistance from tracking

the income of employees or of those interviewed

for a position. This administrative relief can

facilitate the involvement of businesses in the job

growth/job retention program.

• Housing. Housing activities for which CDBG

funds are obligated during a program year may be

considered a single structure for the purpose of

applying the low- and moderate-income housing

benefit criteria at 24 CFR 570.208(a)(3). If a grantee

elects to use this option, it must document that at

least 51 percent of all housing units are occupied by

low- and moderate-income households.

HOME and CDBG

• Clearance, demolition, and removal of buildings and

improvements, including the movement of a

structure to another site;

• Economic Development. Economic

development activities may be exempt from

aggregate public benefit standards at 24 CFR

570.209(b), increasing flexibility for program design.

However, such projects are still subject to the

individual/project public benefit standards under

the same section of the CDBG rule.

• Provision of public services (not to exceed the 15

percent cap);

• Interim assistance to arrest the further physical

deterioration of an area where further, permanent

improvements will be made as soon as possible

(e.g., sidewalk repair, refurbishment of public parks,

special trash and debris removal services);

• Public Services Cap. CDBG grantees are required

to limit the expenditure of program funds on public

services to 15 percent of their annual allocations,

plus the prior year’s program income; however,

activities funded pursuant to a HUD-approved

NRSA/CRSA and carried out by a Community

Based Development Organization (CBDO) within

the NRSA or CRSA neighborhood are exempt from

this cap. This exemption allows grantees to provide

higher levels of public services to dilapidated low-

and moderate-income neighborhoods, including job

training and job creation.

• Necessary costs to complete existing Federal Urban

Renewal projects;

• Temporary and permanent relocation assistance to

families, businesses, individuals, nonprofits, and

farm operations, as required under 24 CFR

570.606(b) or(c), or determined by the grantee to be

appropriate under 24 CFR 570.606(d);

• Payments to cover the loss of rental income

suffered by housing owners whose property is held

for temporary periods for households displaced and

relocated as a result of program activities;

The regulatory flexibility extended to CFDI and

NRSA/CRSA activities reflects HUD’s goal of assisting

communities in their efforts to involve a wide range of

community partners in addressing community

revitalization needs and issues across the country.

Working in partnership with a local CFDI or targeting

assistance to a NRSA/CRSA can provide a grantee

greater flexibility to address neighborhood housing and

public service needs.

• Acquisition, construction, reconstruction,

rehabilitation, or installation of distribution lines

and facilities of a privately-owned utility;

• Special economic development;

• Microenterprise assistance;

Eligible Costs

• Provision of technical assistance to public or

nonprofit entities to build the capacity of such

entities to carry out neighborhood revitalization and

economic development activities, so long as the

activities proposed by such entities are eligible

under the CDBG rule and can reasonably be

expected to meet one of the national objectives; and

Since HOME funds can be used only for affordable

housing, CDBG is an ideal source for paying the non-

housing components of a neighborhood revitalization

initiative.

xii

Provided the activity meets a national

objective, CDBG funds can be used for activities that

support the broad range of community development

and neighborhood revitalization activities that have

been explored in this chapter, including:

• Provision of assistance to institutions of higher

learning if and when the grantee has determined

that the institution in question has the capacity to

carry out one or more eligible CDBG activities.

(Note, public services carried out by institutions of

higher education are subject to the public service

cap.)

• Acquisition of real property by the grantee or a

nonprofit;

• Property disposition through sale, lease, or donation

of any real property acquired with program funds;

• Acquisition, construction, reconstruction,

rehabilitation, or installation of public facilities and

improvements, with the exception of buildings used

for the general conduct of government, as specified

at 24 CFR 570.207(a);

A description of all eligible administrative costs under

both the HOME (24 CFR 92.207) and CDBG (24 CFR

570.206) programs is available in Chapter 1.

HOME and CDBG

Chapter 6:

Making Strategic Investment Decisions

This chapter provides jurisdictions with an overview of the factors they should consider when combining HOME and CDBG funding

in a project or program. As outlined in Chapter 1 of this guidebook, there are strategic options for investing HOME and CDBG

funds. Part 1 of this chapter assists jurisdictions in making these strategic choices for programs and projects. Part 2 of this chapter

highlights key implementation issues for effectively using these funds, such as forming partnerships, application procedures, and

measuring performance.

Part 1: Making Strategic

Investments

As demonstrated in the previous chapters, there are a

wide range of activities that can be undertaken with

HOME and CDBG funds. Yet, many jurisdictions are

not as strategic as they can be about how they invest

these important and limited resources.

Some jurisdictions may use CDBG and HOME to fund

all of their housi

ng activities without discriminating based

upon the best use of the money. So, for example, a

jurisdiction may administer one homeowner rehabilitation

program that is co-funded by CDBG and HOME.

When an application is received, it may be funded by a

combination of both sources or by one or the other

depending upon which has the most funds available.

While this approach can certainly be eligible, it may not

be the most effective use of the resources.

There are two levels to thinking about using HOME

and CDBG

effectively—by program or by project. In

some instances it makes sense to allocate CDBG and

HOME resources by program. For example, HOME

might solely be used for homebuyer assistance and

CDBG might be used for homeowner rehabilitation.

In other instances, it makes sense to evaluate project by

project and determine how and where to use the funds.

For example, a jurisdiction might evaluate a particular

rental pr

oject and determine that HOME should be

used to pay for the construction and CDBG for the

land acquisition.

Jurisdictions typically set out their plans and priorities

for invest

ing HOME and CDBG dollars in their

Consolidated Plans and Annual Action Plans. These

plans involve collecting data, making program

decisions, writing a document, and then sharing the

written plan with the public for comment. Only after

this process has been completed and HUD has

approved the plans, can jurisdictions draw down

HOME or CDBG funds for eligible programs and

projects. Further, jurisdictions cannot fund programs

or activities that are not outlined in the Consolidated

Plan and Action Plan without amending the Action

Plan.

So, in order to write an effective and useful

Consolidat

ed Plan and Annual Action Plan, and in

order to make strategic use of HOME and CDBG

funds, jurisdictions need to undertake an in-depth and

timely analysis of their community development needs

and desired program types.

Exhibit 6-1 highlights the key steps in making strategic

HOME and CDBG inves

tments for projects and

programs. The text then tracks this chart and lays out a

series of topics that are designed to assist jurisdictions

to make effective HOME and CDBG funding

decisions.

HOME and CDBG

Step 1: Evaluate community needs and preferences

Step 2: Determine program types

based upon needs and preferences

Step 3: State intended program outcomes

Step 4: Evaluate relative strengths of HOME

and CDBG v. intended outcomes

Step 5: Assess HOME and CDBG constraints

Step 6: Determine whether program should be

co-funded with HOME and CDBG

Step 7: If co-funded program evaluate each project

to determine appropriate uses of funds

Exhibit 6-1: HOME and CDBG Decision-making Process

Step 1: Evaluate community needs and preferences

Step 2: Determine program types

based upon needs and preferences

Step 3: State intended program outcomes

Step 4: Evaluate relative strengths of HOME

and CDBG v. intended outcomes

Step 5: Assess HOME and CDBG constraints

Step 6: Determine whether program should be

co-funded with HOME and CDBG

Step 7: If co-funded program evaluate each project

to determine appropriate uses of funds

Exhibit 6-1: HOME and CDBG Decision-making Process

Communities can apply these steps in their decision-

making process:

Step 1: Evaluate community needs and

preferences

The first step in determining how and when to use

CDBG and HOME funds is to evaluate the affordable

housing and community development needs of the

community. Often this analysis is conducted as a part

of developing the five-year Consolidated Plan. It is

important to conduct a thorough analysis of housing

needs and preferences before making decisions about

CDBG and HOME funding because it enables

jurisdictions to invest these funds in programs and

locations that will address critical community issues.

The types of information to be collected might include,

but are no

t necessarily limited to:

• Hou

sing demand. This enables the jurisdiction to

determi

ne the types of programs that residents want

and need.

• Housing supply. This inf

ormation covers the

number and type of housing units currently

available in the community. Usually jurisdictions

break down the description of supply into its

subsets, including owner units and types of rental

units (multifamily, elderly, special needs, homeless

facilities, etc.) In addition, this data often includes

information about the vacancy rate for various types

of units.

HOME and CDBG

• Housing cost. Information on housing cost

describes how much families must pay for housing

in the jurisdiction. It is often expressed as both a

net number (rents or sale prices) and as a percentage

of income.

• Housing quality. This information enables the

jurisdiction to determine the number and type of

substandard units in its community. Often, the

jurisdiction maps this information so that it can

visualize where dilapidated housing is a major issue.

• Specific neighborhood issues. The jurisdiction’s

needs assessment should also include a

consideration of the particular needs and concerns

of specific neighborhoods. For example, the

jurisdiction might have one particular neighborhood

where there is an over concentration of low- and

moderate-income households and where it wants to

introduce mixed-income projects.

• Income levels. This information enables the

community to understand its overall poverty level

and the distribution of that income. In some

jurisdictions, there are a large number of very low-

income people and some very wealthy people with

few in the middle. In these jurisdictions, deeper

subsidies might be needed to help the very low-

income families. In other jurisdictions, most of the

population is clustered around the median income.

These jurisdictions might decide to offer more

shallow subsidies to more families.

• Local economic issues. Jurisdictions often collect

data on economic issues such as employment rates,

job creation, business start-ups or tax revenues as a

way of measuring the economic health of their

community. This information may affect decisions

about CDBG and HOME because it might help to

indicate what portion of these funds should be used

toward neighborhood revitalization or job creation

activities (CDBG).

Once the community’s needs have been identified, the

stakeholders of the neighborhood can engage in a

process to begin to articulate a vision and preferences

for the neighborhood. Key stakeholders that should be

included in this planning process include residents,

business leaders and owners, institutions located in the

neighborhood, and nonprofit organizations that are

based or provide services in the neighborhood. Formal

public meetings or hearings, opportunity to comment

on plans and proposed projects, and partnerships that

actively involve stakeholders throughout the planning

process are all useful methods for generating public

input. The ultimate goal is to generate sufficient

information and understanding of need and community

desires to guide decisions about appropriate

development and housing activities.

Step 2: Determine program types based

upon needs and preferences

After determining the needs of the community, the

jurisdiction then needs to decide which types of

programs it will fund. In some communities, the types

of community development programs are driven by the

available funding. In other words, since HOME offers

four eligible activities, the jurisdiction does four

housing activities. If the jurisdiction wins lead paint

abatement money or homeless program funds, it does

those types of programs.

While this approach is certainly understandable, it is

not generally strategic. Instead, it is recommended that

the jurisdiction determine its community development

needs and preferences (per the previous steps in the

analysis) and then design programs that address the

community’s needs. Although both CDBG and

HOME have substantial compliance requirements,

each also offers significant flexibility in the ways that

they can be used.

A wide range of programs can be possible tools in

addressing the jurisdiction’s community development

needs. Options might include any combination of the

following programs:

• Rental housing. These programs are designed to

build, acquire, and rehabilitate rental housing units.

• TBRA. These programs assist individual families to

pay their rent, security and/or utility deposit.

• Homebuyer. These programs are designed to help

individual families to purchase homes.

• Homeowner rehabilitation. These programs

assist existing homeowners to renovate their homes.

• Neighborhood revitalization. These programs

focus on revitalizing a specific geographic area.

They are often multi-faceted including housing,

commercial development, and social service

programs.

HOME and CDBG

• Economic development. These programs are

generally designed to address either employment or

commercial revitalization issues.

• Public services. These programs offer services to

low- and moderate-income people that are designed

to improve health, education, job readiness, safety

or other important issues.

• Public facilities. These are infrastructure programs

that are designed to address concerns like water

lines, sewer lines, streets, or community centers.

Step 3: State intended program

outcomes

As a part of determining which types of programs

should be offered, jurisdictions need to consider the

intended outcomes of those programs. For example,

two jurisdictions could each run a rental housing

rehabilitation program but each might have very

different intended outcomes. Jurisdiction A might be

primarily concerned with the cost of standard,

affordable housing and thus, its goal is to create long-

term affordable rental units. Jurisdiction B might be

more concerned with the blighted appearance of

multifamily housing in a particular neighborhood and

so its goal is to improve housing quality overall.

Both of these are perfectly acceptable outcomes of a

rental rehabilitation program but each might be

designed very differently. In Jurisdiction A, the

community might design a program that focused on

creating the maximum number of affordable rental

units throughout the community. In Jurisdiction B, the

community might design a program that targets

rehabilitation funds to particular neighborhoods and

addresses the most dilapidated units first.

It is therefore important to consider not only the type

of desired program but also the jurisdiction’s intended

outcomes for that program. In its Consolidated Plan

or program design documents, the jurisdiction should

set out what it intends each program to accomplish. In

addition to providing citizens with information about

program purposes, this will assist the jurisdiction to

make strategic investment decisions.

There are numerous outcomes that can come from

community development programs, such as:

• Sustained affordability for low-income families;

• Housing development to create a supply of new

units;

• Reduction of dilapidated units;

• Serving maximum number of low- and moderate-

income people;

• Offering deep subsidies to address the needs of very

low-income families;

• Physical improvement of neighborhoods;

• Job creation or retention; or

• Sustainability or health of community-based

nonprofits.

Step 4: Evaluate the strengths of

HOME and CDBG v. intended

outcomes

Once the program types and outcomes are determined,

the jurisdiction can then evaluate which funding

resources are most appropriate. For jurisdictions that

are both CDBG entitlements and HOME PJs, this can

be a matter of comparing each of the funding sources

to the intended program outcomes determined in the

step above.

For states, in many cases, CDBG is managed by a

different state agency than HOME. CDBG is

generally managed by state departments of community

development or commerce. HOME is sometimes

managed by state housing finance agencies. In these

instances, the two state departments should collaborate

and determine how the resources can best be used

given needs and priorities across the state.

For the jurisdiction that is a CDBG grantee but not a

HOME PJ, or who is member of a HOME consortium

but who does not receive CDBG, the jurisdiction needs

to evaluate its available resources and determine

whether it will apply to the state for funds that it does

not currently receive on its own. For example, a small

entitlement community might determine that it has

needs for both an economic development program and

a homebuyer program. It might elect to use its local

CDBG funds for economic development and apply to

its state for HOME funds for housing assistance.

In evaluating whether to use HOME or CDBG to fund

chosen programs, jurisdictions should evaluate the

intended outcomes of those programs and determine

whether this is a strength of CDBG or HOME or both.

Some general strengths of CDBG and HOME include:

• HOME can provide deep subsidies for very

low-income families. Because HOME rental

HOME and CDBG

assistance is particularly targeted at people who are

at 60 percent of median and below, it can be a good

resource for addressing their needs. The maximum

HOME funding limits (set by the 221(d)(3)

program) are generally high for most jurisdictions

and usually allow for deep subsidies if that is what is

required in order to house very low-income

persons. CDBG can also be used to provide deep

subsidies to help very low-income people but often

has so many competing demands on the dollars that

it is not usually used in this fashion.

• HOME creates long-term affordability. HOME

requires long-term affordability restrictions that can

help to keep housing available to low-income

persons for an extended period of time. In

communities where the housing market is tight and

where the supply of affordable housing is limited,

this can be a real benefit. Jurisdictions can elect to

place long-term affordability restrictions on their

CDBG dollars but this is not usually done.

• HOME can be used to address the needs of

individual renter families. HOME can be used to

create a very flexible TBRA program. A TBRA

program can be tailored to meet the individual

needs of families and can address particular issues

such as utility deposits, security deposits, or special

needs populations.

• HOME fosters the health of nonprofit housing

providers. Because of its CHDO set-aside

requirement, HOME has become a major resource

in strengthening nonprofit organizations. CHDOs

and other nonprofit developers can earn a

developer fee as a part of their projects. In

addition, HOME provides resources such as

technical assistance and CHDO operating subsidies

that further assist these organizations. Lastly,

CHDO proceeds can be a major resource in

funding the sustainability of nonprofits. CDBG

also allows jurisdictions to fund nonprofits but it

does not have a regulatory requirement to do so and

it does not have some of the HOME tools to

advance nonprofit capacity, such as CHDO

technical assistance.

• CDBG can be effective in addressing blight.

Because CDBG allows a limited portion of its funds

to be used to address dilapidated areas or structures

without regard to family income, CDBG can be a

strong tool in urban renewal-style activities. While

HOME can certainly be used to address the needs

of substandard properties, this assistance must be

tied to housing for low-income people. Thus,

CDBG is a good tool for rehabilitating or clearing

dilapidated properties.

• CDBG can provide shallow subsidies for many

people. Unlike HOME, CDBG does not have a

requirement for a minimum level of investment or a

particular property standard. Thus, it can be a very

good tool for specialized rehabilitation programs or

programs where only minor rehabilitation is needed.

In addition, because CDBG does not have these

standards, it can be spread more broadly than

HOME often can—by spending less and helping

more people.

• CDBG can help create jobs. CDBG contains

several eligible activities that are explicitly designed

to help communities create jobs and economic

opportunities for low- and moderate-income

persons. These activities include assistance to for-

profit businesses and assistance to microenterprises.

It can also be used for job training and business

counseling. HOME cannot be used for economic

development activities.

• CDBG can be used for a wide range of social

services and community facilities. Unlike

HOME, CDBG has eligibility categories related to

providing social services, such as health care, day

care, substance abuse services, education, or safety

services. CDBG can be used to assist the

rehabilitation and development of these facilities, as

well as the services themselves. These services can

be combined with housing programs to offer a

more complete package of assistance to low-income

persons and communities. HOME can be used for

some housing-related services if these services are

tied to the provision of an affordable housing unit.

• CDBG can address comprehensive

neighborhood needs. Under the CDBG Program,

grantees can adopt a comprehensive revitalization

strategy area (state programs) or a neighborhood

revitalization strategy area (entitlements). Under

these initiatives, the grantee gets regulatory

flexibility by agreeing to invest in specific low- and

moderate-income neighborhoods. This can help to

foster the redevelopment of these neighborhoods.

HOME and CDBG

Step 5: Assess CDBG and HOME

constraints

After evaluating the CDBG and HOME program

strengths, it is important to look at their regulatory and

statutory constraints. In some instances, the type of

activity that a jurisdiction wishes to undertake may be

ineligible under one or the other program. In other

instances, the activity is eligible but it has certain

requirements that make it infeasible or not cost

effective for the jurisdiction to operate.

Some of the regulatory constraints to consider when

evaluating the use of HOME and CDBG funds

include:

• Number and types of available partners.

HOME requires that 15 percent of its funds be used

to support development activities undertaken by

CHDOs. In some communities, there is a lack of

qualified, experienced CHDOs or there are only

CHDOs with specific types of expertise. So, in

deciding how to fund programs, the jurisdiction

may elect to fund programs where there are

available CHDOs with HOME funds and then use

CDBG funds for other activities. For example,

assume that Jurisdiction XYZ has only two strong

CHDOs and both are experts in homeownership.

The jurisdiction might elect to use its HOME funds

for homeownership because it needs to spend 15

percent of its money through these CHDOs. The

jurisdiction might then elect to use the balance of its

HOME funds and some of its CDBG funds for

rental or homeowner rehabilitation programs.

• Eligible activities. As discussed in the activity

chapters, both HOME and CDBG have constraints

about the types of programs that can be funded.

HOME can only be used for affordable housing.

CDBG can be used for housing but it can also be

used for other activities such as economic

development, public services, or infrastructure. So,

if a community determines that it needs both a

business assistance program and a rental housing

development program, it might elect to fund the

business program through CDBG and the rental

housing program through HOME.

• Approaches to development. It is also important

to consider the ways that CDBG and HOME can

be used to develop housing. As noted in previous

chapters, HOME can be used for new construction,

rehabilitation, and acquisition of housing for low-

income families. CDBG cannot be used for new

construction, except in very limited circumstances.

So, if a jurisdiction determines that it needs new

homebuyer units but that it only needs to

rehabilitate its existing rental units, it might elect to

spend HOME for new homeownership programs

and CDBG for rental rehabilitation.

• Low-income targeting. HOME requires that all

households occupying HOME units be low-income.

However, it allows for targeting of units within

multifamily rental projects so that only a small

portion of the units may be HOME-funded.

CDBG allows for a different type of flexibility in

low-income targeting. Some projects might qualify

under the slum/blight national objective and thus

there is no low-income targeting. However, if the

jurisdiction wishes to use the low- and moderate-

income benefit national objective, then every

household in a single structure and one of the two

households in a duplex must be low- or moderate-

income. In all other structures (three or more units)

at least 51 percent of the units must be occupied by

low- or moderate-income households, with one

exception for projects that assist new construction

of non-elderly rental units. CDBG does not allow

for unit-by-unit targeting of multifamily properties.

When CDBG is invested and the low- and

moderate-income national objective is used, 51

percent of the households must be low- or

moderate-income. So, if a jurisdiction is doing

multifamily housing and it wants to focus on mixed-

income developments where only a small portion of

units are assisted, HOME may be the better

resource. CDBG funds could then be used for

other activities.

• Ongoing compliance. Both HOME and CDBG

require that jurisdictions keep records documenting

eligible activities. However, as noted above for

HOME, the jurisdiction must continue to

document eligibility during the affordability period.

For rental properties, this means documenting

tenant incomes, rents, and unit quality over time.

CDBG does not have any ongoing requirement for

documenting compliance. So, jurisdictions need to

evaluate their staffing resources and capacity to

ensure ongoing compliance. If the jurisdiction does

not have sufficient resources to oversee these long-

term tasks, it may wish to use CDBG to develop

rental properties and use HOME for activities such

as homeowner rehabilitation (which has no

HOME and CDBG

affordability period) or homebuyer assistance

(which typically has shorter affordability periods

and no ongoing inspections).

• Administrative burden. As noted in previous

chapters, HOME and CDBG generally handle

project-related delivery costs differently. Under

CDBG, grantees may charge the agency’s direct

costs of delivering an eligible activity to that activity

itself. Under HOME, the agency’s direct delivery

costs can only be charged to projects when those

costs can be applied to specific projects and

activities, and the jurisdiction maintains

documentation to demonstrate that they are direct

costs. Further, HOME general administration is

limited to 10 percent whereas CDBG allows 20

percent. So, if a jurisdiction does not have systems

that readily allow it to track staff time and expenses

to specific projects, it may want to consider doing

more time-intensive projects with CDBG funds.

For example, for many programs, homeowner

rehabilitation requires a significant amount of staff

time. Agency staff market the program, analyze

homeowner applications, review work item

specifications, and may be involved in inspections.

If the homeowner program is of a large volume, this

can require extensive staff time. If the jurisdiction’s

cost and time tracking systems do not track to each

of these properties, it may wish to use CDBG funds

to pay for the homeowner rehabilitation. CDBG

could pay for the program delivery costs directly

(not under its administrative cap). HOME could

then be used for other types of housing programs

where the direct project costs are less. Alternatively,

the direct costs of the rehabilitation program could

be funded with HOME funds, and certain project

delivery costs could be paid with CDBG as a

HOME-related housing service.

• Match. The HOME Program requires that PJs

provide match in an amount equal to no less than

25 percent of the total HOME funds drawn down

for project costs. Match is a permanent

contribution to affordable housing. CDBG has no

such match requirement. When jurisdictions are

evaluating their funding options, they need to

consider the match obligations that they will be

incurring and determine whether projects in this

type of program are likely to generate match. For

example, homeowner rehabilitation programs do

not usually generate a great deal of match unless the

owner has invested funds in the rehabilitation. So,

jurisdictions need to carefully consider how they

invest their HOME funds in order to ensure that

sufficient match credits are earned.

• Timeliness. Both CDBG and HOME have

requirements related to timeliness. Under HOME,

the PJ must commit funds within two years and

spend funds within five years. Under the

entitlement CDBG program, the grantee must have

no more than 1.5 times its annual allocation in its

line of credit 60 days before the end of its program

year. Jurisdictions should consider how to use

CDBG and HOME so that these timeliness criteria

are met. Over time, jurisdictions should periodically

check their status on timeliness and change program

design in order to address these issues, as needed.

For example, assume that a jurisdiction is

successfully committing its HOME funds within

two years but it is nearing the end of its program

year and it has 1.9 times its grant sitting in its

CDBG line of credit. The jurisdiction might then

decide to fund the next several rental activities with

CDBG, assuming that the Consolidated Plan and

Annual Action Plan allowed for these types of

investments.

Sometimes the funding source constraints are not

regulatory but rather are financial. Some jurisdictions

are CDBG entitlements but not HOME PJs. In this

instance, the grantee will need to decide whether or not

it is cost effective for them to spend resources to apply

to the state for HOME funding, especially if HOME

funds are in high demand. Other jurisdictions may be

both HOME and CDBG recipients but the amount

that they receive under one program or other will help

to dictate how those funds are most effectively spent.

Step 6: Determine whether program

should be co-funded with HOME and

CDBG

Once the jurisdiction has evaluated its needs and goals

and the relative strengths and constraints of HOME

and CDBG, it is time to determine which community

development program should be funded with which

funding source. In some cases, the jurisdiction will

determine that an entire program should be funded by

just one source. For example, the jurisdiction might

fund all homeowner rehabilitation with CDBG.

In other cases, the jurisdiction will determine that both

funding sources can play an effective role in addressing

HOME and CDBG

various elements of a particular program type. For

example, a jurisdiction might decide that both CDBG

and HOME have a role to play in developing rental

housing or providing homeownership assistance.

In determining whether programs should be co-funded

by CDBG and HOME, the jurisdiction should evaluate

whether each funding source—given its constraints—

has an important role to play in that type of program.

If HOME or CDBG have a clear advantage in funding

a particular type of program, then that should help to

dictate the source of program funds. If neither funding

source has a clear advantage, the jurisdiction might

elect to co-fund the program with both CDBG and

HOME and then make specific funding decisions

based on individual project circumstances.

Step 7: If co-funded program, evaluate

each project to determine appropriate

uses of funds

If the jurisdiction has elected to fund some or all of its

community development programs with both CDBG

and HOME, it will need to make project-by-project

decisions on investments. As each project is

proposed, the jurisdiction should analyze that project

using the following questions:

• What is eligible under each program? This

question will help the jurisdiction to determine

which components of the project to cover with

HOME and which to cover with CDBG.

• What total and type of resources are available?

This will assist the jurisdiction to determine the

relative amounts that can be invested from each

funding source.

• What are the opportunity costs of funding with

each resource? “Opportunity cost” is a term

borrowed from economics that means the other

opportunities that cannot be undertaken because

finite resources will be invested in this particular

effort. Jurisdictions should ask themselves this

question in order to make sure that today’s project

will not interfere with tomorrow’s initiative. For

example, if a jurisdiction invests all of its CDBG

funds in a rental housing project, it will not have

funds for the economic development project it also

wishes to undertake.

• Are there regulatory benefits of combining

programs in this project? This question will assist

the grantee to determine whether there is any

benefit to combining the funding sources in this

project. For example, HOME cannot be used for

off-site infrastructure and CDBG cannot generally

be used for new construction. But they can be used

together to develop a new housing subdivision.

• What are the regulatory detriments of

combining programs in this project? This

question helps the jurisdiction to determine whether

there are any negative impacts on the project

because HOME and CDBG are combined. For

example, if a jurisdiction wants to do mixed-income,

rental rehabilitation, it needs to consider that unless

it can qualify the property under the slum/blight

national objective, using CDBG for the financing

means that 51 percent of the occupants must be

low- or moderate-income.

• What is the impact on project feasibility?

Sometimes projects need different types of

financing in order to be viable. However, because

some financing comes with certain strings attached,

it can have an effect on project feasibility. For

example, if HOME is invested in all units in a

project, those units would need to rent for the

HOME rents. These lower rents might mean less

income to the project and, in turn, this might mean

that the project is not financially feasible.

• What is the impact on project administration?

As noted above, HOME requires long-term

affordability restrictions. This means that the

jurisdiction must monitor the project over this

period. So, jurisdictions should evaluate whether

they are prepared and able to monitor the project

given its size and complexity. For example, the PJ

may not have the resources to monitor a 300-unit

affordable housing project.

• Does the project meet the tests for subsidy

layering? Lastly, the jurisdiction needs to

determine whether the investment of HOME is

needed given project finances. Although CDBG

does not have a subsidy layering requirement, it is

prudent to undertake a similar analysis.

HOME and CDBG

Part 2: Effective Program

Implementation

Once jurisdictions have decided to use HOME and/or

CDBG funds to finance a project or program, there are

some implementation variables to consider, including:

• Administering programs;

• Choosing projects and partners;

• Setting up adequate financial systems;

• Developing efficient reporting and record keeping

systems; and

• Reviewing performance and compliance.

Administering Programs

Determining whether staff are available to help plan

and implement projects is critical to ensuring that

programs are effective and reach their intended goals.

Neither the HOME Program nor CDBG dictate the

approach that jurisdictions must use to implement their

programs. Instead, jurisdictions must make choices

about who will administer and implement their HOME

and CDBG programs. Programs may be administered

by:

• Jurisdiction staff;

• Subrecipients;

• Contractors;

• Community Housing Development Organizations

(CHDOs), under the HOME Program. Note, when

administering a program, a CHDO is acting as a

subrecipient and this not a set-aside activity; and/or

• Community Based Development Organizations

(CBDOs), under the CDBG Program. Note, a

CBDO is not a subrecipient by definition, but may

be designated as a subrecipient by the grantee.

Some jurisdictions administer their programs with few

staff and a large number of subrecipients while others

use jurisdiction staff primarily, and few subrecipient

organizations. Factors which tend to affect the degree

to which jurisdiction staff are relied upon more heavily

for project functions include:

• Size of the community/jurisdiction and of the grant

amounts;

• Types of projects undertaken;

• Local politics;

• Capacity of in-house staff; and

• Capacity and availability of subrecipient

organizations.

Determining the appropriate staffing for HOME and

CDBG programs may require:

• Conducting a skills inventory of staff members;

• Developing a list of required skills;

• Assessing where gaps exist between current staff

skills and required skills; and

• Undertaking the appropriate training, capacity

building, and staff expansion necessary to

administer the projects.

Based on the jurisdiction’s analysis of staffing capacities

and upon project needs, the jurisdiction must

determine whether and/or to what extent it will work

with subrecipients, contractors, CHDOs, or CBDOs.

Choosing Projects and Partners

There are a variety of approaches that jurisdictions may

use to select HOME and CDBG projects and partners.

Note, however, that contractors must be selected in

accordance with the procurement requirements of 24

CFR Part 85 (or 24 CFR Part 84 for subrecipients).

There are four basic models upon which the project or

partner selection process can be based; however,

different variations of these approaches may be

necessary or appropriate to meet community needs.

These models are discussed below.

Formal Application Process. The formal application

process requires the submission of a formal application

or proposal, and is typically undertaken once a year in

conjunction with the jurisdiction’s planning and

budgeting process. Under the formal application

process, applications are evaluated based on explicit

selection criteria. This process works best in

communities with:

• Numerous or complex activities;

• Numerous potential applicants with varying degrees

of experience;

• Limited funding and increasing competition; or

HOME and CDBG

• Politics or other community issues requiring

standardized, consistent treatment of all requests for

funding.

Limited Application Process. The limited

application process is similar to the formal application

process, but the application is not as detailed and

jurisdictions provide more follow-up and hands-on

involvement in the process.

• Jurisdictions may review the applications and

narrow the number of applications under

consideration before requesting additional detailed

information from the applicants.

• This approach may be useful for jurisdictions

interested in encouraging the participation of

potential applicants who may not be familiar with

the project or the application process, or when the

jurisdiction’s program is not complex.

Solicitation of Applications from Qualified

Organizations. Jurisdictions may identify potential

qualified applicants through an informal process or

through a general request for qualifications (RFQ).

From the identified group, jurisdictions identify

organizations to carry out specific activities and

approach the organization about their interest in doing

so.

“Open Door” or Unsolicited Application Process.

The “open door” process encourages or allows

consideration of requests from applicants at any time

during the year, and may or may not include an actual

application. If jurisdictions decide to use the “open

door” approach as its only means of accepting

applications, they must ensure that all applications are

treated consistently and that the same types of

information are received and reviewed by jurisdictions.

Table 6-1 summarizes the major advantages and

disadvantages of the four methods for choosing

partners for HOME and CDBG projects.

HOME and CDBG

Table 6-1: Choosing HOME and CDBG Projects

Type of Process Advantages Disadvantages

Formal Process

(Such as a Notice of Funds

Availabi

lity or a Request for

Proposals)

Requires applicants to provide all the

information needed regarding the

organization’s capacity and experience

Helps to ensure consistency

throughout the evaluation process

× Ten

ds to favor more experienced

applicants

× Requires substantial jurisdictio

n staff

time to ensure consistency throughout

the process

× Limits

new applicants to one chance

per year

Limited Application

Process

(Such as an Assisted Request for

Proposals)

Process is mo

re open

May

attract new applicants and new

ideas to the project

× Shifts the respo

nsibility for determining

capacity and experience to the

jurisdiction

× May re

quire more jurisdiction staff time

× May no

t ensure the consistency and

fairness that is more evident in the

formal process

Solicitation of

Applications

(Such as a Request for

Qualifications)

Proa

ctive and more focused on

qualified organizations

May

result in less jurisdiction staff

time to administer

× Much more “cl

osed door”

× Can resul

t in criticism of the jurisdiction

selection process

× Lesser known,

but possibly equally

capable organizations may be

overlooked

“Open Door” Process 3 May allow opportunities for

jurisdictions to more quickly respond

to community needs

× Process is unplanned

× May re

quire crucial staff time and effort

to respond because applications may

come in at any time

× May

allow the commitment of funds to

projects before qualified applications

are received

× Ten

ds to result in budget changes and

project amendments throughout the

year

Setting Up Adequate

Financial Systems

As jurisdictions begin to think about designing financial

systems for their HOME and CDBG programs, there

are some key principles of financial management that

should be considered. These key principles of financial

management are:

• Protecting funds, property and other assets against

loss or misuse;

• Rec

ording receipt and use of funds to be able to

account for where all funds came from and how all

funds were used;

• Recording

assets and liabilities to be able to account

for what is owned and what is owed;

• Retaini

ng source documentation to support receipt

and use of funds;

• Ensuring

that fund expenditures are consistent with

the budget, as it may have been amended, and are

not in violation of any of the restrictions or

prohibitions that apply to the Federal assistance;

• Managi

ng cash effectively to avoid unnecessary

borrowing costs and to take proper advantage of

opportunities to earn interest;

• Ensuring th

at costs are reasonable and properly

allocated;

• R

eporting complete and current financial results to

permit an accurate assessment of financial results;

and

• Using audits t

o strengthen financial management

systems.

HOME and CDBG

In order to comply with these requirements, seven

elements must be present in a jurisdiction’s or

subrecipient’s financial management system:

1. Accura

te, current, and complete disclosure of

the financial results of each Federally-

sponsored program, including sources and

application of funds.

2. Com

parisons of outlays with budgeted

amounts for each award.

3. Sound internal controls

over purchases, cash

disbursements, and cash receipts, including

segregation of duties and proper authorization

and approvals of transactions.

4. Periodic in

ternal and external audits or

evaluations.

5. Rec

ord retention policies.

6. Do

cumentation of accounting policies,

particularly those pertaining to cost charging,

timesheet preparation, and procurement.

7. An accou

nting system that meets the following

requirements:

Segregation of unallowable costs from

allowable costs;

Segregation of direct from indirect costs;

Proper assignment and allocation

of costs to

functional classifications;

Matc

hing of income and applicable credits

with associated expenditures;

Timel

y reconciliation of accounts and

subsidiary ledgers;

Time-charging systems th

at allocate labor

costs among program activities and comply

with OMB Circular A-87 or A-122, as

applicable;

Consiste

ncy in accounting treatment over

time and from one function or award to

another;

imely and accurate financial reporting; and

Maint

enance of proper supporting

documentation for all transactions,

estimates, and calculations.

Developing Efficient

Reporting and Record

Keeping Systems

As a general rule, jurisdictions must establish and

maintain sufficient records to document that program

requirements are met. Both the HOME and CDBG

programs have specific requirements regarding records

retention—five years for HOME and CDBG, or longer

for the HOME affordability period or if there are any

unresolved audit findings—but jurisdictions should

establish their own requirements for records that

should be submitted and retained by their partners.

These requirements should enable the jurisdiction to

meet HUD requirements and maintain complete

information about funded projects.

In addition, record keeping is crucial to the successful

management

of HOME- and CDBG-funded activities.

Insufficient documentation is likely to lead to

monitoring findings, and these findings will be more

difficult to resolve if records are missing, inadequate, or

inaccurate.

To assess the strengths and

weaknesses in record

keeping systems, jurisdictions should think about the

following:

• Is there

a clearly defined process for acquiring,

organizing, storing, retrieving, and reporting

information about HOME- and CDBG-funded

activities?

• How c

an the documentation and reporting systems

be strengthened to meet HUD requirements?

• Who is res

ponsible for the majority of record

keeping and reporting tasks, and are they properly

trained and supported?

• How c

an standardized procedures and the removal

of duplicative records streamline the record keeping

and reporting process?

• What types

of records and reports could be

automated (i.e., computerized) that are not now?

For the HOME Program, the following records must

be m

aintained:

• PJ designation;

• Progr

am records;

HOME and CDBG

• Project records;

• CHDO records;

• Financial records;

• Program administration records; and

• Documentation records (i.e., documenting

compliance with Federal requirements such as equal

opportunity and fair housing, and conflict of

interest).

For CDBG, the following records must be maintained:

• General administrative records;

• Financial records;

• Project/activity records;

• National Objective records;

• Income documentation records; and

• Subrecipient records.

Jurisdictions must provide citizens and other interested

parties with reasonable access to records. Access must

be consistent with applicable state and local laws

regarding privacy and obligations of confidentiality.

HUD and the Comptroller General of the United

States, or any of their representatives, have the right to

access any records of jurisdictions and subrecipients for

auditing, excerpt, or transcript purposes.

Reviewing Program

Performance and

Compliance

Performance measurement is an organized process for

gathering information to determine how well programs

and projects are meeting needs, and then using that

information to improve performance and better target

resources.

It is important for jurisdictions to periodically review

their programs to ensure production and accountability,

and to ensure compliance with HOME, CDBG, and

other Federal requirements. In addition, reviewing

program performance is not a one-time event;

jurisdictions should conduct a thorough review of their

programs at least annually to make sure the programs

remain an effective source of services for low-income

households.

There are several reasons jurisdictions should consider

using performance measurement as a tool to better

manage their programs. These reasons include:

• Much of the data needed to improve performance is

already being collected by staff members or through

computerized systems such as IDIS.

• The jurisdiction’s capacity to utilize program funds

more effectively will make it possible to stretch

HOME and CDBG dollars to assist more low-

income households.

• Having good information and being able to

demonstrate success allows jurisdictions to promote

and defend their programs to elected officials and

the public in general.

• Reviewing program performance can allow for

better informed long-range planning, and it may

generate data that will simplify preparation of the

Consolidated Plan and annual reports.

• Reviewing program performance helps jurisdictions

detect and address errors or problems, which can

otherwise be both costly and frustrating.

One way that jurisdictions can demonstrate program

effectiveness is to establish a system to formally

monitor their programs and track progress. There are

two ways to conduct a program monitoring review—

desk review and on-site review.

Desk Reviews. Desk reviews are a key component of

basic monitoring activities. They involve examining

information and materials provided to jurisdictions by

funding recipients, as a means to track performance

and identify potential problem areas.

Staff performing desk reviews should examine progress

reports, compliance reports and financial information,

to adequately assess performance and look for

indicators of performance or compliance problems. If

questions or concerns arise from the review, staff

should gather additional information through telephone

calls or additional documents and other written

materials.

On-Site Reviews. There are three steps that comprise

the basic framework of conducting an on-site program

monitoring review. Jurisdictions should use these steps

as guidance when undertaking on-site reviews,

including reviews of subrecipients.

HOME and CDBG

• Step 1: Prepare for the Monitoring Visit. Before

the monitoring visit, jurisdictions should make sure

staff is adequately trained for this task. Staff should

be thoroughly familiar with the applicable program

rules and the established monitoring protocol. In

addition, staff should review the following types of

in-house data prior to the visit:

Application for funding;

Written agreement;

Progress reports;

Draw-d

own requests;

IDIS reports;

Corr

espondence;

Previous monitoring reviews; and

pies of audits.

• Step 2: Conduct the Monitoring Visit. There are

four basic elements to

conducting an on-site

monitoring visit:

Notification—jurisdictions should call funding

recipients to explain the purpose of the visit and

to agree upon dates for the visit. A formal

notification letter should follow at least several

weeks before the planned visit.

Entrance conference—jurisdictions should hold an

entrance conference at the beginning of the site

visit with the top official of the organization to

make sure everyone has a clear understanding of

the purpose, scope, and schedule for the visit.

Docum

entation, data gathering and analysis—

jurisdictions should keep a clear record of

information reviewed and conversations held

with staff during the visit.

Exit conference—jurisdictions should meet again

with t

he top official of the organization at the

end of the visit to present any preliminary results

and to secure any additional information to

clarify or support the programs that were

reviewed.

• Step 3: Follow-Up

. At the end of the process,

jurisdictions should provide the funding recipient

with formal written notification of the results of the

monitoring review. This letter should both point

out problem areas and recognize successes.

Corrective Actions. Jurisdictions ar

e responsible for

taking appropriate actions when performance problems

arise. Written agreements should be the primary

mechanism for enforcement in situations of

noncompliance.

There are three increasingly serious stages of

interv

ention. A jurisdiction’s response to monitoring

findings will depend upon the seriousness of the

performance problem.

• Stage 1: Low

-level Intervention. At this stage,

jurisdictions should clearly identify problem areas

and required corrective actions; plan a strategy with

the funding recipient that includes any training or

technical assistance that may help address identified

problems; require more frequent or more thorough

reporting; or conduct more frequent monitoring

reviews.

• Stage 2: Moderate-level Intervention.

Jurisdictions may need

to take increasingly tougher

steps such as restrict payment requests; disallow

certain expenses or require repayment of funding

provided for certain expenses; or impose

probationary status.

• Stage 3: High-level Intervention. Juri

sdictions

must take the most serious actions to put an end to

performance problems. Suggested steps during this

stage include: temporarily suspend the organization

from participation in either the HOME or CDBG

program; do not renew the organization or activity

for the next program year; terminate the

organization or activity from the current program

year; or initiate legal action.

Incorporating Training and Technical Assistance.

As stated e

arlier, reviewing program performance

should not be a one-time event. To be an effective tool

for avoiding problems and improving performance,

monitoring should be an ongoing process of planning,

implementation and follow-up.

In order to avoid future problems with funding

recipi

ents, training and technical assistance should be

an ongoing feature of jurisdiction programs. There are

three basic approaches, that taken together, focus on

enhancing performance and reducing common

problems among funding recipients.

HOME and CDBG

• Orientation sessions, typically held at the beginning

of a funding cycle, provide a forum for discussing

basic requirements and procedures, and to discuss

expectations about performance.

• Training, typically aimed at larger audiences, focuses

on specific issues and provides sufficient technical

detail necessary for funding recipients to understand

and implement program requirements. Training

should be held throughout the year, and should

enhance performance and long-term capacity of

funding recipients.

Technical assistance, typically provided in a one-on-one

or small group setting on-site, is designed to correct a

specific weakness or to improve the quality or

performance of a specific program already underway.

HOME and CDBG

Endnotes

The insular areas include American Samoa, Guam, Northern Mariana Islands, and the U.S. Virgin Islands.

The national model codes used by the HOME Program are the Uniform Building Code (issued by CABO), National

Building Code (issued by BOCA), and the Standard (Southern) Building Code (issued by SBCCI). Since the

promulgation of the HOME Program regulations, these code-issuing agencies have merged to form the International

Code Council (ICC). The model codes used for the HOME Program are no longer being updated; in their stead, the

ICC has adopted the International Building Code. HUD will consider whether changes to the HOME regulations

incorporating the International Building Code are appropriate.

iii

Generally, conversion of an existing residential structure to affordable housing is rehabilitation under the HOME

Program. Conversion projects are treated as new construction only when adding one or more units beyond the existing

walls. See 24 CFR 92.205(a)(3).

The national model codes used by the HOME Program are the Uniform Building Code (issued by CABO), National

Building Code (issued by BOCA), and the Standard (Southern) Building Code (issued by SBCCI). Since the

promulgation of the HOME Program regulations, these code-issuing agencies have merged to form the International

Code Council (ICC). The model codes used for the HOME Program are no longer being updated; in their stead, the

ICC has adopted the International Building Code. HUD will consider whether changes to the HOME regulations

incorporating the International Building Code are appropriate.

For a detailed discussion of this issue, see The HOME Program’s HOMEFires, Volume 5, Number 2. June, 2003.

Available online at http://www.hud.gov/offices/cpd/affordablehousing/library/homefires/volumes/vol5no2.cfm

vi For more information, see HOMEfires, Volume 1, Number 1. June 1, 1997. Available on-line at

http://www.hud.gov/offices/cpd/affordablehousing/library/homefires/volumes/vol1no1.cfm.

vii

The national model codes used by the HOME Program are the Uniform Building Code (issued by CABO), National

Building Code (issued by BOCA), and the Standard (Southern) Building Code (issued by SBCCI). Since the

promulgation of the HOME Program regulations, these code-issuing agencies have merged to form the International

Code Council (ICC). The model codes used for the HOME Program are no longer being updated; in their stead, the

ICC has adopted the International Building Code. HUD will consider whether changes to the HOME regulations

incorporating the International Building Code are appropriate.

viii

The requirements for income eligibility are found at 24 CFR 92.2 (definitions of “low-income families” and “very

low-income families” and 24 CFR 92.203 for eligibility criteria for HOME, and 24 CFR 570.3 (definitions of “income,”

“low- and moderate-income household,” “low-and moderate-income person,” “low-income household,” “low-income

person,” “moderate-income household,” and “moderate-income person”) and 24 CFR 570.200 for general policies on

eligibility for CDBG, respectively.

For projects that include HOME-assisted and non-assisted units, the rehabilitation costs of the non-assisted units are

not included in this calculation.

Note, the State CDBG regulations do not contain any guidance on the use of lump sum drawdowns. The Housing and

Community Development Act requires that lump sum drawdowns follow the requirements prescribed by HUD. The only

requirements issued by HUD are in the Entitlement regulations. Therefore, states must follow the entitlement regulations regarding

lump sum drawdowns.

Applicable to CFDIs with charters that define the investment area as being primarily residential with at least 51

percent low- and moderate-income residents. Activities carried out by CFDIs receive special regulatory consideration

regardless of whether the CFDI is actually receiving funds through the CFDI Fund. For more information, see

http://www.cdfifund.gov/.

HOME and CDBG

xii

HOME can be used for the housing portion of mixed-use projects, and for the low-income units of a mixed-income

housing development. When funding the eligible portion of a development, PJs and their housing partners are required

to track the actual costs of the affordable housing units in a mixed-use project. In a mixed-income project, the costs of

the affordable units can be pro-rated as portion of the total development costs, when the units are comparable in terms

of size and amenities.

HOME and CDBG