1. Tiffani C. Moore, Senior Affordable Housing Specialist Office of Affordable Housing Programs January 22, 2015 2013 HOME Program Final Rule: CHDO Clinic for HOME PJs

2. CHDO provisions of 2013 HOME Final Rule Anticipated impact on CHDOs – Organizational shifts – Project pipeline planning Be on the lookout for further – Guidance and Rulemaking Objectives Slide 2

3. First comprehensive update since 1996 Changes throughout, but of most importance: – Timeliness—commitment, completion, occupancy deadlines – Sustainability—project underwriting, emphasis on capacity, property standards Generally effective for project commitments on/after August 23, 2013 – Some delayed provisions, property standards still pending 2013 HOME Final Rule Slide 3

4. 2013 HOME Rule CHDO Impacts Slide 4

5. Reservation (new definition): CHDO set- aside funds are reserved only when committed to a specific project – Non-project-specific reservations no longer count toward CHDO set-aside requirements PJs must reserve CHDO set-aside to specific CHDO projects within 24 months CHDO Reservations Slide 5 Commitments

6. PJs may not commit HOME funds (and set up in IDIS) to a new construction or rehabilitation project until: – All necessary financing is secured – A budget and production schedule is established – Underwriting and subsidy layering is completed – Construction is expected to start within 12 months Dated signatures required on written agreement CHDO Project Commitment Slide 6

7. A PJ can make a contingent award of HOME funds for a proposed project – Contingent on obtaining financing, completing environmental review, etc. Contingent awards are NOT reservations or commitments – Do not satisfy PJ’s 24 month commitment deadline PJs are advised that contingent awards should: Have clear performance and cancellation provisions Not be open-ended promises Contingent HOME Award Slide 7

8. PJ responses – More selective funding, key underwriting concerns – Commitments will likely come later, will a PJ offer contingent awards? – Impose shorter completion and interim performance deadlines to allow for fall-back – Conduct more oversight – Add detail to written agreements – Increase initial occupancy monitoring and reporting Implications Slide 8

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10. Each time a PJ commits funds to a specific CHDO project, it must certify that the nonprofit: – Meets CHDO definition (including the staff capacity requirement) – Has capacity to fulfill specific role (owner or developer/sponsor) it will assume for the project This is in addition to the underwriting and other conditions for a project commitment CHDO Certification Slide 10

11. CHDO is expected to maintain CHDO status for the duration of the CHDO project – Includes affordability period for rental housing PJ is expected to develop procedures to ensure CHDO status is maintained Maintenance of CHDO Status Slide 11

12. CHDO Checklist Checklist ItemSet-Aside Reservation Pre- Development Loan Operating Expenses 1. Legal Structure 2. Independence 3. LI Community Accountability 4. Capacity * 5. Role 6. Pre-development costs 7. Operating expense eligible *Exception: Can award funds to an organization without staff capacity only if the operating award will allow the organization to obtain staff capacity needed for project funding.

13. Independence CHDO independence from governmental & for-profit entities Capacity CHDO staff capacity Two Major Revisions to Definition Slide 13

14. Pre-2013 provisions about government entities still apply: – Government entity can create a CHDO, but cannot appoint more than 1/3 of board (and they cannot appoint remaining 2/3) – No CHDO can have more than 1/3 board members who are public officials or employees of a government entity Plus 2013 HOME Final Rule additions: – Government entities includes PJ, other jurisdictions, public housing agencies, HFAs, redevelopment agencies, or tribes – Officers/employees of a governmental entity may not serve as officers (CEO, COO, CFO, managers) or employees of any CHDO Independence from Governmental Entities Slide 14

15. Pre-2013 provisions for CHDO created by a for profit entity apply, for-profit creating CHDO: – Cannot have primary purpose of housing development or management – Cannot appoint more than 1/3 of board; those members cannot appoint remaining 2/3 – CHDO must be free to contract w/any vendor Plus 2013 HOME Final Rule addition: – Officers and employees of the for profit that created the CHDO cannot serve as officers or employees of the CHDO Created by For-Profit Entity Slide 15

16. Staff counted toward capacity must be paid directly by and accountable to the CHDO – Cannot be contracted through/cost-allocated from another entity Usually, staff will be “employees” for tax purposes – CHDO pays payroll/unemployment taxes and withholds from wages – W-2 is definitive evidence of being “paid employee” for HOME purposes Absent W-2, PJ must review employment contract to assess CHDO’s level of control over when, where, and how work is done – Draft HOMEfire Defining Paid Employee Slide 16

17. CHDOs must have paid staff w/ demonstrated capacity appropriate to CHDO’s role: – Use of consultants to demonstrate capacity ONLY during the 1st year of funding as a CHDO Role is primarily to train staff to build their capacity – Cannot meet capacity requirement with volunteers, donated staff, or board members What is not paid staff? Slide 17

18. Staff can be full time or part-time, but PJ must determine whether capacity is sufficient, based on: – Role: owner, developer, sponsor – Size, scope, and complexity of project – Experience of employees in similar projects Core development skills and rental or homebuyer-specific knowledge – Level of staff effort for pipeline and project(s) (part-time vs. full time, number of staff) Capacity Considerations Slide 18

19. Tie certification to project funding, determine how – To handle “full” and “updated” review for CHDOs receiving multiple commitments (e.g. series of SF projects) – To address ongoing CHDO status in rental monitoring Determine framework to evaluate staff capacity – Variation for own vs. develop vs. sponsor AND homebuyer vs. rental Additional attention to board composition – Expanded definition of governmental entity, need to document for all board members Implications Slide 19

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21. CHDO Checklist Checklist ItemSet-Aside Reservation Pre- Development Loan Operating Expenses 1. Legal Structure 2. Independence 3. LI Community Accountability 4. Capacity * 5. Role 6. Pre-development costs 7. Operating expense eligible *Exception: Can award funds to an organization without staff capacity only if the operating award will allow the organization to obtain staff capacity needed for project funding.

22. Own, Develop, and Sponsor roles defined in §92.300(a)(2) - (6) – Previously in CPD-97-11 Roles clarified/redefined, especially – Expands opportunities under “owned” – Clarifies Tax Credit and subsidiary projects under “sponsored” CHDO must demonstrate capacity in relation to its “role” Own, Develop, or Sponsor Slide 22

23. CHDO owns, rehabs or constructs, then sells property Written agreement with CHDO must include: – Actual sales price or method for determining it – Disposition of proceeds of sale (return to PJ or permit CHDO to retain), and use of proceeds if CHDO will retain Not CHDO-specific, but all buyers must be underwritten, no more one-size fits all downpayment assistance CHDO as Developer: Homebuyer Slide 23

24. CHDO acquires & acts as owner of rental housing – It does not have to develop housing units – If development, CHDO hires and oversees project manager or contracts with developer to perform rehab or construction CHDO must be owner in fee simple or have long-term ground lease during development and affordability period CHDO as Owner: Rental Slide 24

25. CHDO itself owns and develops housing CHDO arranges financing and is in sole charge of construction or rehab CHDO must be owner in fee simple or have long-term ground lease during development and affordability period CHDO as Developer: Rental Slide 25

26. CHDO develops rental housing on behalf of another non-profit and transfers title after completion – Conveyed at pre-determined time to pre- identified non-profit – Other non-profit cannot be created by governmental entity, but can be another CHDO If transfer does not happen, CHDO must maintain ownership for affordability period CHDO as Sponsor-Rental Turnkey to Other Nonprofit Slide 26

27. Rental housing is “sponsored” by a CHDO if owned or developed by a: – For-profit or non-profit that is wholly-owned subsidiary of the CHDO; or – If owned by an Limited Partnership (LP) or Limited Liability Company (LLC), the CHDO or its wholly owned subsidiary must be the sole general partner (LP) or sole managing member (LLC) CHDO as Sponsor: Rental CHDO Affiliate Slide 27

28. Written agreement must be signed by PJ and the entity that will own the project – Funds (loan) must be provided directly to ownership entity If LP/LLC, documents must specify: – Removal of CHDO only permitted for cause – CHDO must be replaced with another CHDO CHDO as Sponsor: Rental CHDO Affiliate (con’t) Slide 28

29. Owner role expands opportunity for CHDOs without “development” experience, some may be new CHDOs Re-examine turnkey sponsor role Sponsor in LIHTC transactions – No more 51/49 joint ventures – No more grant to CHDO, loan to partnership structures – New written agreement provisions re: maintaining CHDO status, removal/replacement of CHDO Implications Slide 29

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31. CHDO Checklist Checklist ItemSet-Aside Reservation Pre- Development Loan Operating Expenses 1. Legal Structure 2. Independence 3. LI Community Accountability 4. Capacity * 5. Role 6. Pre-development costs 7. Operating expense eligible *Exception: Can award funds to an organization without staff capacity only if the operating award will allow the organization to obtain staff capacity needed for project funding.

32. Predevelopment loans – Increased importance with enhanced commitment requirement – Overcome liquidity issues impeding project planning CHDO operating assistance – Program design issue: shifting from ongoing “entitlement” to focus on building capacity – Available without “full certification” if operating addresses “but for” capacity concerns Optional CHDO Support Slide 32

33. Proceeds from sale of homebuyer development – PJ choice: RETURN as Program Income vs. RETAIN as CHDO Proceeds Written Agreement specifies use: – HOME-eligible activities Could including operating support or non-set-aside activities – “Other housing activities to benefit low-income families” Could include assistance to struggling rental project, broad based counseling program, etc. CHDO Proceeds Slide 33

34. CHDOs need: – Pipeline – Predictability Tell them: – What types of projects does your PJ want (and what your PJ does not want) – Key underwriting requirements, esp. market data – Skills framework Challenge communicating in shifting environment – Markets, funding levels, guidance If a CHDO does not know what a PJ wants… Slide 34

35. Mutually dependent, but not equal – Set-aside alone cannot sustain a CHDO – PJs wants / CHDO own vision Balancing “size” and focus – Expanding product portfolio – Expanding geographic footprint – Staying focused on “community” Strategic challenges Slide 35

36. Evaluate the CHDO “pool,” does it need to be – Thinned or expanded Reconsider predevelopment, operating, proceeds – Focus on capacity needs Rebalance funding process – Competition vs. matchmaking Implications Slide 36

37. Further HUD Guidance – Notices on CHDOs, Commitment, Underwriting, etc. HOME accounting changes – FIFO – Cumulative deadline measurement (requires rule making) Future rulemaking – Technical corrections, technical amendments – Homeownership counseling, cross-cutting standards – Energy efficiency and resiliency – Broader HUD/USDA/Treasury alignment efforts Still to Come Slide 37

38. Questions & Answers Slide 38

39. Anticipate some uncertainty Communicate with your CHDOs See hudexchange.info for more information – Join the HOME Program listserv – www.hudexchange.info/mailinglist/ www.hudexchange.info/mailinglist/ Reminders & Tips Slide 39