NDC_21Aug12_FIN Page 1 of 31 Sandra Jones, Matt Wexler, Jennie Vertrees, John Burke, John Laswick, Hunter Kurtz

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1 NDC_21Aug12_FIN Page 1 of 31 Sandra Jones: Good afternoon. My name is Sandra Jones. I'm with the National Development Council. And besides being a trainer at NDC, I'm also the chief portfolio manager at NDC's 19-year-old revolving loan fund, the Grow America fund. We have a diverse portfolio and help our partner communities reinvest funds from numerous sources, including CDBG, CDFI, USDA, and others, back into their communities. I will be available after our presentation as well to address some policy operational and well as portfolio management questions that you may have at the end of the presentation. Also with us Matt Wexler with Cross Sector Consulting. Matt has worked extensively with NSP recipients throughout the country. And finally, we also have John Burke, John Laswick, and Hunter Kurtz from HUD with us. So without further ado, a brief review of the agenda. Okay. Basically, many folks working with NSP have wondered about setting up a revolving loan fund, but have had numerous questions regarding the process, the ramifications, and the challenges that taking on such an endeavor could bring. As a little recap, revolving loan funds have been a vital component of economic and community development strategies around the country for decades. A majority of those funds have been set up to address economic development needs. But over the last few years especially, more and more of these revolving loan funds have tried to shift their focus towards housing needs. NSP recipients have a unique opportunity to expand the housing component of this true and tried tool. So basically what is the revolving loan fund? A revolving loan fund are loan funds that are designed to fill gaps in the local capital market. They're typically very flexible, and they should have built-in mechanisms so that they can change over time in order to remain, you know, relevant and impactful. As far as the NSP program is concerned, how does this work? Well, under NSP, the revolving loan fund has to be established as a separate fund that is established with NSP program income. These are set up to carry about eligible NSP activities, which will in turn generate program income themselves, which will therefore enhance the revolving character of the loan fund. As a little reminder, revolving loan funds are consistent with HUD's suggestion that assistance be structured as loans and not as grants. So in order to be an effective revolving loan fund, what are Page 1 of 31

2 NDC_21Aug12_FIN Page 2 of 31 we trying to accomplish? We're trying to set up a fund that is a self-sustaining fund, and that has a truly revolving component to it, so that those NSP dollars will keep working in your community for many years to come. How does that work? What is specifically a revolving loan fund? Well, it is a financing tool. What does it do? It recycles dollars. So you have program income. It gets re-lent out into the community. When it gets repaid back, that is how it recycles the dollars. Another important aspect of revolving loan funds under NSP is that they can be used to help manage the flow of program income, and we're going to talk a lot more about program income in the new few slides. Additionally, revolving loan funds will provide a mechanism to utilize NSP funds in a manner that is consistent with local priorities. And since these programs have been in effect for a few years, and it's expected they will continue to have an impact in the future, it's important that the programs remain flexible so that you can change with the needs, and the program can change and accommodate a lot of those needs. Another important aspect of revolving loan funds is that they typically encourage the leveraging of private sector financing. That can be from nonprofits or from for profits or public programs, and specially for NSP, some programs that are very relevant would be things like low income housing, tax credits, and the home program. As far as operating the funds, there's a lot of different considerations. The first and most important, of course, is that in order to operate a revolving loan fund, you would have to be a grantee of NSP1, NSP2, and NSP3 funds, or a subrecipient of one of those grantees. Establishing the revolving loan funds for specific activities may actually expedite how a grantee draws down the funds for activities with different purposes. So when we talk about the use of funds and how to do it, there'll be a little bit more of a discussion on that. As far as the subrecipient, they can be existing or they can be new subrecipients. They're typically nonprofits or municipal grantees. However, they can also be for profits under certain circumstances. It's also important to note that grantees may allow their subs to keep program income. However, they must dictate how the program income is to be used. Page 2 of 31

3 NDC_21Aug12_FIN Page 3 of 31 To speak more on the eligible use of funds, I would like to introduce Matt. As I said, he has worked extensively with NSP recipients around the country, and he's going to share some of his experiences with us. Matt? Great. Thanks very much, Sandra. I appreciate that. Now I'd like to get into some more NSP details. This slide talks about the eligible uses of funds, and really, the RLFs, the revolving loan funds, can be used for anything that NSP can be used for. However, keep in mind that we're really talking about three NSP programs, 1 2, and 3. So the slide says all eligible activities under HERA and ARRA, right, the Housing and Economic Recovery Act and the American Recovery and Reinvestment Act, as applicable. So that means if you're an NSP1 grantee and you want to use program income from an RLF, you've got to follow the NSP1 rules and regulations. Now what could you do with those funds? So some examples of activities would include loans to purchase and develop foreclosed houses; you could fund a loan loss reserve; you could make loans to home buyers for first or second mortgages or for shared equity loans. These are just some examples of things that you might do with revolving loan funds, and quite frankly, you could also do those same things with program income. Moving to the next slide, I want to talk about program income for just a few slides, right? The revolving loan fund must be capitalized from program income and not from the original NSP grant funds. You can't make a draw request to HUD through DRGR and say, "I'd like to draw down a sum of money and use it for an RLF." You really need to be looking at your program income sources, where the program income is coming from, and understanding how you're going to capitalize your RLF. Now the revolving loan fund is really an opportunity. It's an opportunity to redefine and to expand what you're doing with NSP funds. It's not a requirement. It's just a tool that's available and very useful under specific circumstances. So if you wanted to do something different than your existing NSP program activities, an RLF might be a great opportunity to partition off those funds and to create a separate activity to expand what you're doing. One of the things that comes up about RLFs, and this is true or it's similar to the case of program income is that RLF funds are tracked separately from your general funds, and they're also tracked separately now in DRGR from other program income. Page 3 of 31

4 NDC_21Aug12_FIN Page 4 of 31 They are not subject to the use first requirement. That is to say, if you are continuing with your existing NSP activities and you've got obligations under which you'd like to draw, you don't necessarily draw first from your RLF, but rather continue to draw on your line of credit for your general fund activities. So essentially, the RLF is a way to partition the funds. But I want to remind folks that it's really something you're going to do to expand your existing programming, and not something you'll do as a sort of defensive maneuver to protect funds. So what happens is we have program income coming back and we don't establish and RLF? Well, the answer really is just to continue to use that program income to recycle it for your existing NSP program activities. There's nothing wrong with that. If you continue to have additional houses that you want to acquire in rehab, if you have additional multi-family projects to which you want to make loans, we encourage you to continue to pursue those activities. You don't necessarily need an RLF to continue to do that. Where is the programming come going to come from to source funding for your RLF? Well, it's where program income comes from. So that could be net proceeds from single family home sales. It could be sales of land which are held under land banking initiative or activities. It could also be repayment of principal and interest from loans, such as from permanent financing offered to single or multi-family properties. And it could be from other financing activities as well. In other words, you can take program income from whatever sources you want and choose proactively to direct it into an RLF, if that's a part of your plan. So what are the key requirements for creating one of these revolving loan funds? Well, first you have to go through the formal process of creating a plan amendment, and this is really where we encourage you to think long and hard, and by long we mean long-term, and by hard, it's really about lots of the details that you have to consider before mounting and RLF, and before writing out what you want to do in the RLF through the plan amendment. So you've got to have program income to capitalize your RLF. There is an exception, somewhat technical exception, with a lump sum drawdown. I don't want to get into that right now, but I think Page 4 of 31

5 NDC_21Aug12_FIN Page 5 of 31 people should generally plan to be looking to program income to source their RLFs. Grantees and subs need to set up a separate set of accounts, both book accounts to do your accounting work and bank accounts to track the funds for your RLF. We really strongly recommend that. It makes all of your entries in DRGR easier, but also you're preparing yourselves for creation of financial statements and any monitoring or auditing that should take place. The RLF funds needs to be held in an interest-bearing account. They are going to generate interest, and you need to remit interest to the Treasury at least once a year from those funds. And lastly, I guess I mentioned this earlier, before, but the revolving loan fund must comply with the source of funds, NSP1, 2, or 3. I will make a comment there, which is to say that you could create an RLF which combines funds from let's say NSP1 and 2 or 2 and 3 or whatever combination as long as the rules for operating that RLF comply with each of the sources of those funds. So it is possible to combine those funds, but you really have to be aware of what the policies and procedures are for operating your RLF, and make sure that you're following the respect NSP rules and regulations. So when you're considering putting one of these revolving loan funds together, here are some considerations taking place. You really need to think about what the activities are that you want to undertake and what the appropriate number would be. In many cases, it's simplest from an administrative point of view to have each RLF associated with a single activity. So as you think about how you might expand your programming, think about what specific activities you may want to undertake and whether or not it makes sense to create an RLF to in fact do that. Other things that you should consider are what is the size of the RLF likely to be. So this goes to budgeting, which we'll get to in another couple of slides. What the geography might be with your revolving loan fund. One of the things that you might consider doing with an RLF is targeting a different geography. If you've been very active within an existing geography and there's an opportunity to do some more NSP work in another low income community, an RLF may be a good way to target funds towards that activity. Just a reminder here that as with NSP, when you're setting up these activities, you're not to set up a fund for acquisition that's separate Page 5 of 31

6 NDC_21Aug12_FIN Page 6 of 31 from rehab. Those are really considered a single activity under NSP, and you're going to use a single RLF to do both of those activities. So once you've got your design set, you've submitted your plan amendment, it's been approved, you're beginning to formulate your budget and getting ready to operate your revolving loan fund. The first thing you've got to be aware of is you've got to be ready to go. You've got to be ready with your action plan to move quickly, because these funds need to be deployed. They can't just sit still in an account over a long period of time. That's not really the purpose of an RLF. The idea is that once you establish this loan fund, you've already got activities that you're wanting to fund, so you should be ready to go as soon as you're up with funding. Another consideration is that the principal and interest payments that you'll have coming back from your RLF activities are considered program income. So here's the revolving nature of the fund, and as we'll discuss in a few slides, there's a way to record that principal and interest as receipts in the RLF, which will then track those into DRGR, so you can continue to have the funds available for ongoing RLF activities. You will record the activity in DRGR, and these next few bullet points on this slide 14 sort of give you a preview of what's to come with the rest of the presentation. But you're going to record the activity in DRGR. It's very important to think about the administrative costs of operating and RLF, and one of the key reasons for doing this is really because right now, with NSP funds in an RLF, really, you're going to continue to revolve those funds over and over and over again, and there's administrative costs associated with that. So you really should think about how big the budget would be for your RLF, what kinds of activities, and then really what kinds of staffing and other administrative support you might need in order to implement that revolving loan fund. Policies and procedures are very strongly recommended, and compliance and monitoring is another consideration that we get to in the next few slides. So these next two slides sort of provide a little bit of a step back. We're trying to address a question that we think many folks may have about program income, about RLF, and what we're saying here is that if a grantee is expending an amount of program income and grant funds equal to or greater than their original NSP grant amount, it's very unlikely that your line of credit is somehow going Page 6 of 31

7 NDC_21Aug12_FIN Page 7 of 31 to be swept out by HUD or OMB or OIG, as folks once had thought might be possible. So the reason for pointing this out is to say that the revolving loan fund shouldn't be used as a way to somehow part your program income so that you can draw down on the rest of your general funds first, because when HUD is looking at your activities, they're looking at your expenditures in both program income, including RLF, and grant funds, and comparing that to your grant amount. NSP 1 and 3 funds, they don't have an expiration date. NSP2 funds are expected to expire in September of 2015, and I think that the HUD folks are still working out a few details about that. But that's everyone's expectation at this point in time. So we want to encourage folks to think about using this RLF and just point out that it really should be a proactive tool and not somehow a defensive tool for segregating and somehow accelerating your expenditures from your general fund. Okay. So if you do not expend an amount of grant funds and program income equal to your grant, then yes, it's possible that that shortfall is subject to recapture by HUD as indicated in the NSP regulations. Please keep in mind that program income in a revolving fund is not expended until it's used for a particular activity. So program income comes back, you're directing it to an RLF. You may have a budget there. You may have some obligations which you've registered. But until you expend that activity, it's not counting towards your net activities under this equation. Okay. Some further considerations here about the grantee and the structure, and this slide, the first bullet point puts up municipal grantee versus not for profit. And it's not a competition. It's not that one is better than the other. It's really a question of where does the revolving loan fund fit within the overall housing strategy for that organization? So sometimes with municipalities, there are divisions of labor and divisions of activities between redevelopment authorities, housing/finance authorities, public housing authorities, Department of Housing, and they each can have their own particular niches or specialties of activities. So when you're considering creating an RLF, think about the activities that are planned and really who's best suited to do them. And it may or may not be the municipal grantee or the grantee at all. Page 7 of 31

8 NDC_21Aug12_FIN Page 8 of 31 With a not for profit grantee, I think the biggest consideration for a not for profit is really just to make sure that the RLF is consistent with the mission of the not for profit. You don't want to do something that's going to get outside of the nonprofit's focus and otherwise sort of take it adrift from its already existing activities. Another consideration is how subrecipients will interact with revolving loan funds. This is a particular consideration because I think there's great variety across the country as to the agreements between grantees and their subrecipients about how program income will be managed, and by extension, how program income directed to an RLF could be managed. So I'm aware of at least one case, and I'm sure that there are many others, where a grantee is allowing subrecipients to create RLFs, and with that goes a whole series of questions about how those funds will be managed, who will keep and control the cash, what the reporting requirements will be, and how that fund will be operated. And those are all things that should be figured out in great detail between the grantee and the subrecipient before trying to launch anything. One of the additional considerations about the administrative costs is that although this is a structured as a revolving loan fund, it's possible in some circumstances, and it may be planned, purposefully put into place, that not all of the loan funds would be coming back to the grantee or the subrecipient managing the RLF. That is, the loan funds are funding an activity, and some of those NSP funds remain in the program, essentially as a subsidy. And with that, what it means is that the amount of money that revolves over time is going to be reduced, right? It's going to go down. If I'm making a loan for a single family acquisition rehab of $150,000.00, and I leave as a developer subsidy $30, in that project, and I receive $120, from sales proceeds, if I continue with that pattern, pretty soon I'm going to run out of funds. So something to think about is what's my activity, and how am I going to revolve those funds? Will I have a diminishing fund over time, and if so, how should I plan to administer those funds? One of the considerations that you might take time to look into is whether or not the administrative costs can be spread across other RLFs, and with that, we don't mean that NSP funds are funding the administration of other revolving loan funds. Rather, what we're saying is that the function and the work of the administration of an RLF can be paid for when it's an NSP RLF, but if those funds are Page 8 of 31

9 NDC_21Aug12_FIN Page 9 of 31 small and not enough to support the entire administrative costs, then it's possible that those same administrators, those staff persons or consultants, whoever they may be, can also be managing other, that is, non-nsp revolving loan funds, as a part of their work, and use some of the funding available there to support their activities. So that's more a question not of combining financing, but of figuring out how to support the administrative costs associated with managing an RLF. So we very strongly recommend that folks take time to put in writing a set of policies and procedures for operating and RLF, and because the use of these funds, the source and the use of these funds really comes from NSP, any policies and procedures manual or document is really going to be based upon your existing NSP policies and procedures. So the question then becomes what is going to be different about your RLF, and how should that be reflected in policies and procedures? So some of the things that might be different are how you're selecting your projects. If you're going into a new geography, you may have a different process for choosing which projects are eligible and which projects you want to fund using your RLF. You may have a different underwriting process, depending upon the activity that you have. There may be a separate approval process. This is particularly relevant for RLFs where a subrecipient is operating an RLF. There may be different approvals required between the sub and the grantee as to project selection, approval of underwriting, and approval of the close of financing. And finally, if we haven't sort of hit this point enough, administration for the RLF. In some cases, the creating an RLF, particularly if it's not for something which is really separate and distinct from your existing NSP activities, can just add another layer, and it can add another layer of administration and costs that are associated with that. And so we just caution folks on that point, to think hard and really plan this out in detail. Okay. Here is a slide of an example of an existing revolving loan fund. It is for the Neighborhood Housing Services of South Florida. These happen to be folks that I worked with a little while ago. They are an NSP2 grantee. They head up a consortium with seven members, who are technically subrecipients. And they have been I should say Neighborhood Housing Services has created an RLF to make loans to home buyers acquiring foreclosed homes. Page 9 of 31

10 NDC_21Aug12_FIN Page 10 of 31 Now this is an activity that's different from their original scope of activities under NSP2, so they made a decision to expand what they were doing programmatically to be able to make homes directly to homebuyers. So this is new for them, and they're just starting this. Right now, I think they only have a couple hundred thousand dollars of activities, of expenditures, under this RLF. But critically, they've also paved the way by establishing a policy for their subrecipients to create revolving loan funds. So these subrecipients would be allowed to use program income from their existing activities and revolve it and use it to create RLFs. It's not a requirement. It's simply an opportunity. But a part of the requirement if they are going to create RLFs is that they have to create policies and procedures, and they have to get the approval of the Neighborhood Housing Services of South Florida before they establish the RLF and before they direct any program income into that RLF. So some of the advantages of this, simply that it allowed NHS to refine its strategy. They saw a need for principally second mortgages to homebuyers who were looking to acquire foreclosed properties. They didn't see much activity in the market. And they said, "Hey, I can use my NSP funds as a tool to fill this need," and they started to do that, and I expect they're going to continue to do a lot of that in the coming years. The other thing about the RLF is that really it's a way to continue to recycle the funds otherwise you recycle with program income, really an opportunity to expand the program. NHS is a grantee with a very large award, $89 million in NSP2, and given their original activities, quite a bit of that funding is going to come around again. It's going to recycle. And now that they are a couple of years after their original NSP2 application, after their original consortium agreement, where subrecipients chose the eligible activities that they wanted to pursue, it's an opportunity to reflect, to look at the market and to consider whether or not these same activities are appropriate and valuable or whether something different might be useful. So if those are the advantages, then there's a couple of challenges that come with this as well. The first of hose is going to be tracking funds and communication. NHS is providing the opportunity for these subrecipients to retain the program income; that is, to keep the cash from, for example, net sales proceeds from the sales of single family homes. However, those transactions, that Page 10 of 31

11 NDC_21Aug12_FIN Page 11 of 31 amount of money, all needs to be reported regularly to NHS, as NHS is the grantee responsible for tracking all of those funds, and responsible for reporting on that activity to HUD. So with the policies and procedures of any subrecipient RLF, there's expected to be a section which addresses both how the funds will be tracked and reported on and what the communications protocols will be with the grantee, NHS. The other piece of this is administrative costs, and the twist here is simply that with the RLF in subrecipients' management, there will be administrative activities both at the subrecipient level and at the NHS level. They're both going to have responsibilities associated with the ongoing operation and management of these funds. And the question of what administrative costs will be able to be paid from this program income, from this RLF program income, and who gets them are something that they need to address to make sure that folks feel as though they have sufficient funds to cover the costs of the administrative activities that they're expected to carry out. So as I say, in this consortium, right now NHS is the only one that has established the RLF and is operating their RLF. They've opened the door for others to do so, but as of today, none of the subrecipients has yet gone through that process to get their fund up and running. Here's an example of another NSP grantee, this is a NSP2 grantee, from Reading, Pennsylvania, and just to give you a reminder, an idea, that it's possible to revolve or recycle these funds without an RLF. It's not a requirement to create an RLF just to continue to do the same NSP activities as your original grant enabled you to do. So the City of Reading is a part of a consortium. There is a not for profit called Our City of Reading, and the Public Housing Authority that are both members of that consortium. They have a $5 million NSP2 award, which is focused on single family acquisition and rehab. And critically, they are using as their source of funding for this activity all NSP2 funds. So what that means is that for a given housing project, let's say a single family unit, they're making funds available for the entire acquisition and rehab activities, paying for all of that with NSP funds, and when they have a sale of that house, all of the net sales proceeds are treated as program income. They have sold about 11 homes thus far, and I think there's probably about another 12 or so on the market, and another 20 that are in active stages of acquisition and construction. Page 11 of 31

12 NDC_21Aug12_FIN Page 12 of 31 But critically, the folks in this consortium want to continue to do what they have already done with their NSP funds. So they have already taken program income from the 11 houses that have thus far been sold and are continuing to go out and acquire additional single family homes, rehab them, and simply to continue the process. So this is simply an example to say you don't have to create an RLF. Here's an example of an NSP2 grantee which is has a significant amount of program income. It's not a huge award, but they've already moved through move of their award, expended most of that, and are generating program income on a regular basis, and continuing to use that program income for further activities. Let's switch gears for a few slides, last couple of slides here. And these are really about the administrative processes within DRGR. So it's making draws or requesting draws and tracking funds in DRGR, right? Program income and revolving loan funds are both going to be set up under activity budgets and obligations in DRGR. The grantees are going to be able to identify, that is, to create revolving loan funds using the DRGR project screen. So a little bit of a change, and I think it came out in a DRGR policy alert in December of last year. But you can now categorize program income basically in three different ways. One way is to say that program income simply is recycled in your general account, and in many ways this is what the example of the City of Reading consortium was doing. They are not creating a separate revolving loan fund. They're not creating any separate program income accounts. They're just continuing to recycle their funds. So that would be number one. You could also treat your program income as a revolving loan fund, right? You're setting up a project to be your revolving loan fund with a single activity. The funds are going to revolve within that RLF. And the third option would be to set up a program income account, and really, this is where you are segregating program income so that it could remain with a specific subrecipient. So this in fact is what is happening right now with the NHS South Florida consortium, where the subrecipients are allowed to keep their program income. Although none have created revolving loan funds, they're setting up separate program Page 12 of 31

13 NDC_21Aug12_FIN Page 13 of 31 income accounts so that the program income can be tracked by subrecipient. So this is the way in which you're going to control sort of how that program income gets categorized, and then consequently, how it gets budgeted, obligated, and expended. Right? So this slide, setting up RLF, is a little bit of a repeat of what I just mentioned. That is, if you are administering an activity and you're allowed to retain the program income, and you can use the action plan module within DRGR to designate a project as a revolving loan fund, and here it says to make sure that only activities under the RLF are assigned to the project. Now typically, as we'll see in the next slide, you're really talking about an RLF for a specific activity, right? You're setting up an RLF at the project level within DRGR, but you're also associating it with a specific activity, a single specific activity. And really, the RLFs are going to have that one to one ratio. You're creating an RLF to carry out a very specific activity. As we mentioned in the previous slide, you can also create a program income account this is more so for subrecipients and associate activities, plural, with that PI account, because a subrecipient may in fact be undertaking more than one activity, and creating this PI account allows you to segregate those funds and sort of keep them recycling within that subrecipient. Here's a slide with a bit of a screen shot from DRGR. It's from the project excuse me, from the program screen. And you're identifying your RLF by project, right? One RLF for one project. And it's one activity per project. And so you're limited here in the way that you're focusing the funds, and that's very specific. And so once again, the idea is that you are designing your RLF with a very specific activity in mind which you're going to pursue with the RLF. So when you create additional vouchers to draw on funds in DRGR for RLF activities, DRGR is going to look first to the funds that are available in the RLF to fund that activity before drawing from the general account. So in this way, you are going back to your RLF and recycling those funds first for that specific activity. So ongoing operations and closeout. The funds that revolve, they are considered program income, and they're going to remain NSP funds until further notice. So right now, even if you revolve your Page 13 of 31

14 NDC_21Aug12_FIN Page 14 of 31 funds in your RLF ten times, on the tenth turn, they're still considered to be NSP funds and have to follow all of the NSP rules and regulations, until we have any further notice from HUD. The other thing, and this is sort of last word, is again, please think and plan carefully about the costs and benefits of continuing this RLF over time. Create a spreadsheet. Make a financial projection. What do you think your budget is going to be? How quickly do you think you're going to be obligating and spending those RLF funds? And how quickly do you think that they'll revolve? And that'll give you an idea of how long you think the RLF will last perhaps before it runs out of funds, how much in administrative costs or funds to cover administrative costs you'd be able to generate from the RLF, which is an important consideration for your expenses, your expense considerations, and then finally, you know, what you want to do with this RLF over time. Right now, we are a couple of years out from the initial NSP applications and awards, and if you have an RLF that continues to be active for two or three years, you may in fact have a market shift in your community, and you may decide that the original purpose of the RLF is no longer the best use of funds for your community, and you may want to change things. And you can do that, but really, you want to make sure that your RLF is set up to go for the long haul when you set it up at the beginning. So that is the end of the slide presentation, and I think that we have plenty of time to respond for questions and answers. And I think first we're going to turn to the questions that folks who are on the line now want to ask in the live Q&A, and then after that, we'll go to questions that folks have written in through the WebEx webpage. That's right, Matt. And right now there are no live Q&A questions, but we do have a couple of written ones. So again, if you do have a verbal question, if you could just select the hand icon and we'll put you in the queue and make sure that we unmute your line and get you into speaking with Sandra and Matt. But the first question is written in from Renee, and her question is agencies that are part of a statewide consortium may not be able to keep PI if the lead entity is requiring PI to be returned. I guess that's more of a statement, if you want to comment to that. Yeah. It really depends. It depends from one grantee to the next. My understanding is that the grantees have the ability to require Page 14 of 31

15 NDC_21Aug12_FIN Page 15 of 31 that program income is returned to them from subrecipients, or they can allow subrecipients to keep that program income, and how it's recycled, whether it just continues to fund existing activities or whether it's directed into something different I think is really first and foremost up to the grantee, but of course with the subrecipient having a role in shaping how PI is used at their level. Okay. The next question comes from Tehani, and I apologize if I've butchered your name, but her question is we have an existing loan fund. Can we further capitalize it with PI or does a separate fund need to be created? Well, I think the question is what is the existing fund doing, and whether or not its activities are all eligible activities and it is structured in such a way that it would be essentially following NSP rules and regulations. I think that for administrative purposes, there may be an advantage to combining the funds. However, there's also the flip side, which is that NSP funds have distinct tracking and reporting responsibilities, and your existing funds probably do not carry those same responsibilities. So to blend the two together is a little bit risky and dangerous in the sense that you still have to keep them partitioned for tracking and reporting purposes. What you could do is simply use NSP program income to fund, if they are eligible activities, the same activities as your existing RLF, and that would allow you to maintain NSP funds separate for tracking purposes. Okay. And the next question is from Jean. She asked if you could go over to the screen showing the RLF entering into DRGR. I can. I can go back to that, if this is the slide 24 is the one that you're referring to. I think actually, we are borrowing. We are borrowing from a previous webinar with this slide, and the webinar is called DRGR Update, and the date of that is December 6th, And really, that webinar and the slides that are published and available from that webinar go into significantly more detail about DRGR and how to create the RLF and then track funds through DRGR for your RLF activities. And this is John. And you might also if you really get confused or if your situation is pretty complex, request some technical assistance in that area. Thanks, John. Another question that we have from Lindy, and she's asking, we generated PI from the resale of homes under Page 15 of 31

16 NDC_21Aug12_FIN Page 16 of 31 NSP1, have now expended it using the first in/first out rule. If we want to now set up an RLF, where do those funds come from? Or do we have to set up the RLF prior to the generation of PI? Well, I guess I if I understand the context right, it sounds as though you've had NSP program income come back, but you have expended all of that program income, and if that's the case, I think that this is an opportunity, again, if you want to expand your programming, change your geography, or otherwise take a slightly different strategic direction, to create an RLF now, and as this future program income comes in, to dedicate that to the RLF. I think, though, you have to consider what's changed in your market or your organization that now is the right time to do that. So if you've already had program income that's been recycled, then you've already used it successfully, what's going on right now that might suggest that a change is in order? Okay. And I think the point, again, is that you have to capitalize these funds with program income, so wherever you are in that process, you can't really put a big budget in there directly out of your line of credit or something. I would also Okay. There's another question from Mark. Please confirm, one, every time RLF principal and interest is received, then this PI can be redeposited into the RLF; two, MLF can pay for NSP-eligible activities, of which admin as a percentage can be paid; and three, can third party private capital be deposited into an RLF? I think the answer to question one is yes. The principal and interest that comes back is program income, and can be recycled through the RLF. Could you repeat question two, please? Sure. Number two, MLF can pay for NSP-eligible activities, of which administration, I guess, admin as a percentage can be paid? I'm not sure what MLF M as in mother, L-F? Yeah. I don't know quite what that's referring to, but I think that funds that come back that are program income funds are open to pay for administrative costs in the same way that NSP funds can pay for administrative costs. And these are program admin costs as Page 16 of 31

17 NDC_21Aug12_FIN Page 17 of 31 opposed to activity delivery costs. So my understanding is that within an RLF, you can take ten percent of those program income funds in your RLF and use those for appropriate administrative activities. Okay. And then the And this is another reason to think about the projection of your RLF over time, because if the funds that are recycled are going to diminish over time, the amount of money available to you for recovering administrative costs is also going to diminish. And then the third Okay. And then question the third question was can you capitalize the RLF with third party funds? Can third party private capital be deposited into an RLF? Well, I think, again, it's sort of it reminds me of the question that we had a few moments ago, where you're combining NSP funds into an RLF with funds from another source, and what I would say about that is I think, although it may be tempting to get to a certain scale, that the downside of that is that you really risk, with your tracking and reporting responsibilities, getting conflating the two funds. And so I think probably for administrative purposes, it may be easier to keep the funds separate and have them direct toward the same activities. Now that's slightly different from an admin and accounting point of view, but I think it's moving towards accomplishing the same end, which is to use both the NSP funds and the third party private capital to fund the same activities. We do have another question from Jean. Is it possible to use all your NSP funds and be operating with just your RLF and PI? If so, would you close out your NSP award and continue with PI and the RLF? Or does the NSP award stay open until all NSP, PI, and RLF funds are expended? Well, we're working on that right now, and I think that there's going to be at which your balance and your well, when your balance in your line of credit is zero, that has to be that's a precondition of close-out. Where you are in a cycle of program income in a revolving fund, I think we'd probably try to pick some Page 17 of 31

18 NDC_21Aug12_FIN Page 18 of 31 low point in that cycle so that we could close and allow you to operate after the close-out rather than keeping it open just for the purposes of that, because it potentially could run on for several years, and we're not interested in keeping the grants open indefinitely. So that we're just in the process of that, and we just submitted the close-out notice to Departmental Clearance. We talked to OMB about it last week. So that is moving, and some of those details will become more public and able to be discussed as we get a better handle on whether anybody's got any problems with what we're proposing. Okay. Next question is from Patricia. She's asking, our lead agency originally intended to manage a loan fund and a loan loss reserve, but unfortunately, it never materialized. Regarding NSP2 with a short timeline left, does it make sense to try and set up an RLF? Well, I don't think the timeline is really the issue. I think that the funds for NSP2 will be available through September of 2015, so it's not so much a question of should I bother setting up an RLF as what do I want to use the funding for, and is the RLF the right tool to pursue that activity? Yeah. This is John. I agree with that. And I think we tried to make this point a little bit before. There was a concern and there still is a little bit of a concern that these funds just in NSP2 might be vulnerable if you still have funds in your line of credit. The vulnerability would not hit before September of So there isn't any rush to set up a revolving fund to keep the program income segregated so that you could continue to draw on your line of credit. The corollary is that you don't really need a revolving fund, a revolving loan fund, to do that. You could do it all you could do the same thing with subrecipient agreements. So as Matt said, it's more of a strategic decision, and it should be made proactively rather than defensively. As he said before, I think there's time to do this, but there isn't any sort of urgency as far as these funds go, and you could set them up at any time. Hunter Kurtz: John, it's probably worth mentioning that and we mentioned this earlier on the webinar, that funds put in an RLF do not count as expended. Right. Page 18 of 31

19 NDC_21Aug12_FIN Page 19 of 31 Hunter Kurtz: You have to John Laswick: Just putting them in the revolving fund doesn't count as expending them, so that doesn't really you know, that doesn't change the equation for you. Matt also mentioned that John Burke had just finished I think a very handy policy alert on revolving funds that just came out I think yesterday on the Resource Exchange, kind of timed with this webinar. So there are some additional details and kind of strategic and policy considerations in there. Most of those I think Matt and Sandra have worked into this very well, but it's another resource for you. Okay. There's a comment from Cindy. If subrecipient is allowed to retain program income, it must be used on a first in/first out basis. Well, at the subrecipient level, that's true. But if you have ten subrecipients, then one subrecipient's program income doesn't get drawn before another subrecipient can draw funds from the line of credit. So conversely, if you only have one or two subrecipients, then having a revolving fund or subrecipient agreements allowing them to keep the program income isn't going to really help that much, because you're still going to be having to use the program income a lot of times before you can make further draws. She does have a follow-up. If a subrecipient is allowed to set up an RLF while still implementing the activity with NSP2 funds, does the program income collected by the activities still have to be used in a last in/first out basis? If so, how can it be used to build up the fund? Well, I mean, maybe Matt can chime in. I don't think there's any problem with sort of establishing a fund midstream and then starting to deposit funds into it, and playing by those rules from there on out. I think once you've segregated it, you've segregated it. And at that point, you're making draws against other parts of the organization or other activities are making draws against the line of credit. Do you agree with that, Matt? Yeah, I do. I mean, I think you can set up an RLF and to budget for it, and then you're really going to populate that account with receipts from program income. So if you've been using program income for something else and you think that you've got a particular strategy which an RLF would be valuable to pursue, then you can do that now. There's nothing to stop you from doing that. Page 19 of 31

20 NDC_21Aug12_FIN Page 20 of 31 But again, there's a couple of comments or questions about the whole issue of first in/first out or last in/last out. An RLF is really not meant to address that question or that issue in any way. It's really meant to address a programmatic issue, which is how do we use NSP funds to best suit our market conditions and our organizational capacity? And so that's really I think the foremost consideration. John Laswick: Okay. We do have another question from Adrian. We have a PI agreement with a subrecipient to retain their PI and use for two NSP-eligible activities in an RLF. Do we need to set up a PI account or an RLF in DRGR to re-seed it? All RLF has to be sent prior to drawing I lost it prior to drawing from the general account, correct? Well, it depends upon what the RLF activities are for. It sounds like from the question that they have identified two specific activities, and so if then you have another draw which is fund those activities, you'd be looking first to the RLF to fund those activities. Having said that, if you are funding activities for which the RLF is not set up, then you'd be looking to your general fund to draw down those monies. Okay. Another question from Allen. Once an RLF is set up and the grants are closed out, will reporting continue in DRGR, and if so, for how long? I'm going to pass that one to our folks at HUD, if they have a comment about that. Could you repeat that, please? We were talking about the last question. Sure. Once an RLF is set up and the grants are closed out, will reporting continue in DRGR, and if so, for how long? I believe the plan is at this point that reporting on post-closeout would be annual through the yeah, through the John's showing me what it says in the guidance. What is that, John? Oh, here. I can share that. So post-closeout for former NSP grantees that are CDBG entitles or state governments, reporting on NSP funds will eventually transfer from DRGR to IDIS, and will be required annually, not quarterly. Page 20 of 31

21 NDC_21Aug12_FIN Page 21 of 31 Hunter Kurtz: Hunter Kurtz: Right. The only exception to that would be if you are a an all non-profit NSP2 grantee that doesn't have access to IDIS, but there's only about 14 of those, so And remember, closeout is not the deadline coming up in March. Right. Closeout is a is a different deadline. Closeout will probably be a year and a half or two years after the coming March, so right. Okay. Patricia asks, did you say that NSP2 timeline has been extended? No. That there's two things going on there. Okay. So you still have until February 11th and no later to expend an amount equal to your grant. That could include program income as well as direct grant draws. The issue, though, that we're talking about is that if you have earned program income, you are required to spend it first, and therefore, you may not have drawn all the funds from your line of credit. And the question is, are those funds at any kind of risk of being taken back because they're Recovery Act funds? Are they at any risk of being taken back if they're still in your line of credit at the end of September 2013? So I'm glad you brought this up so that we can make sure people understand that the deadline has not been extended, and we're only talking about whether you've got funds left in your line of credit, and the idea of using a revolving fund or subrecipient agreements as a way to move program income into a place where it doesn't have to be drawn before you draw further funds from your line of credit. It's a little complicated, I realize, but you still only have until February to spend that money. And we do and we think that the chances of that funding being taken back before 2015 are very small, but there's still a possibility of that, and we're trying to work that out with OMB right now. Okay. Gary submitted a question. Is the process of setting up and tracking I'm sorry. Is the process of setting up and tracking a PI account the same in DRGR as RLF? And the answer is yes, essentially, but you're segregating it within the program screen and setting up a separate program activity for Page 21 of 31