U.S. Department of Housing and Urban Development Program Income August 23, 2011 HUD Community Planning and Development
Speakers and Q and A Format Speakers David Noguera, HUD Marsha Tonkovich, ICF Janine Cuneo, ICF Vincent Grady, ICF How to ask questions Change status in Live Meeting from green to purple Press *1 to ask a question through Premiere Conference Provide Name and Organization If question already answered, press *2 to remove from queue Change status back to green after question answered 2
Agenda Presentation on key topics: What is program income? Tracking program income in DRGR Open session to take your questions! Per past attendee feedback, will do entire presentation (approximately 75 minutes) & then take questions (approximately 45 minutes) 3
Resources on Program Income Policy Alert dated 7/13/11 NSP 10/19/10 combined program notice NSP AAQ (search on program income) CDBG regulations at 24 CFR 570.504 4
Definition of Program Income Program income (PI) = gross income received by the grantee or subrecipient from the use of program funds: Proceeds from sale/lease of property acquired, rehabbed, redeveloped with NSP Principal and interest on NSP loans Recapture of home sales under affordability agreements Interest on program income pending use Repayments of liens placed on privately owned property that was demolished using NSP money 5
Definition of Program Income (cont) PI is income received by grantee or subrecipient (cont): Net operating income (NOI) from rental properties NOI from rehabilitation projects (eligible under 570.202) or new construction carried out by developers (both for-profit and nonprofit) is NOT considered program income Nonprofit is not subrecipient (unless designated by grantee) Refer to HUD s Guidance on NSP-Eligible Acquisition and Rehab Activities dated 4/23/09 for more information 6
Definition of Program Income (cont) Net operating income (NOI) from rental properties owned by grantees or subrecipients (cont): NOI is calculated prior to debt service example: Rental income: $40,000 Operating expenses (including deposits to operating and capital reserve accounts): ($30,000) NOI (program income): $10,000 Private loan debt service: ($8,000) PI remaining after debt service: $2,000 7
Definition of Program Income (cont) Net operating income (NOI) from rental properties owned by grantees or subrecipients (cont): PI can be used to pay debt service on private loan if: Private loan was used solely to finance costs of approved project; Private loan proceeds were used in accordance with all NSP applicable requirements (e.g., Davis-Bacon); Private loan was made from an external lender (grantee/subrecipient cannot lend itself the funds); and Use of program income for debt service payment was contemplated when project was approved. 8
Definition of Program Income (cont) What isn t PI? Income in a single year to grantee and all subs not exceeding $25,000 in total Must add together all PI earned by grantee and subs to determine if under threshold Risky to assume will be under cap and spend income on ineligible items unless absolutely certain income will not exceed $25k threshold for year Proceeds of subrecipient fundraising Funds collected through special assessment
Definition of Program Income (cont) What isn t PI? Interest earned on: Cash advances from grantee Funds held in revolving loan fund account (except for funds in approved lump-sum drawdown accounts) This interest is returned to HUD for transmittal to U.S. Treasury
Definition of Program Income (cont) What isn t PI (cont)? Subrecipients proceeds from disposition of real property five years or more after grant close-out Proceeds earned and retained by a community based development organization (CBDO) under an eligible 105(a)(15) activity Need to tie to affordable housing Funds earned and retained by entities that are not grantee or subrecipient (developers, owners, contractors etc)
Income Earned by Households & Developers Grantee not required to get funds back from private individuals & developers (non subrecipients) Individuals & developers considered as end users under CDBG Avoid undue enrichment HUD suggests structure assistance as loan not grant May also wish to share in excess cash flow or sales proceeds 12
Applicable Credits Receipts that offset or reduce expense items allocable to direct or indirect NSP costs Examples: check for overpayment on closing costs; insurance payments; purchase rebates or discounts Works like PI except: 10% admin not allowed Low income set-aside does not apply In some cases may be netted out from expense rather than received as cash to grantee/subrecipient 13
Program Income & Low Income Set Aside (LH25) HUD wants to remind grantees of change in October 19, 2010 combined NSP Notice NSP1 Notice was not clear about applicability of low-income set-aside to PI 25% set-aside for families below 50% of AMI applies to the grant plus any PI Became effective October 19, 2010 and applies to all PI received after that date 14
Program Income & Low Income Set Aside (cont) Policy ensures consistency with Congressional intent Low-income families have been hit especially hard in housing crisis and need help Most communities can adjust to this change, since PI still being received PI received by date will be available on spreadsheet Nationwide Oct. 18, 2010: $102,567,532 August 22, 2011: $315,292,204 Difference: $212,724,672 25% of Difference: $ 53,181,168 15
Program Income & Low Income Set Aside (cont) Example: Grantee XYZ total NSP1 grant: $10,000,00 Grantee XYZ plus all subrecipient PI at end of grant: $1,000,0000 Minimum threshold for LH25: $2,750,000 ($10,000,000 + $1,000,000 X 25%) 16
Program Income & Low Income Set Aside (cont) Requirement must be met by closeout, so time and more PI will facilitate planning Amount matters - not whether grant or PI pays for eligible activity -- Amount = 25% of grant +PI received HUD will work with each grantee to ensure that it can meet requirement Grantee can receive technical assistance on request to NSP Resource Exchange 17
Timing of Program Income PI is earned in perpetuity Number of revolutions does not matter Date of receipt does not matter PI received after end of NSP in 2013 remains PI Use of PI at NSP grant closeout has not yet been decided -- HUD will issue a notice Under current notices and CDBG regs, funds turn into CDBG PI 18
First In First Out (FIFO) Must use PI prior to drawing new NSP funds from DRGR PI cannot be held for specific projects PI cannot be banked, except while waiting to use it, and without earning interest Example: A. PI on hand in grantee/subrecipient account received from sale of completed NSP home: $35,000 B. Funds currently needed for ongoing demolition and land bank projects: $85,000 Request for funds from DRGR (B minus A): $50,000 19
First In First Out (cont) PI obligated or spent counts toward deadlines for baseline obligation and expenditure requirements Example: Total NSP1 grant: $10,000,000 Total PI earned and spent: $1,000,000 Minimum of $9,000,000 grant funds must be spent by February 2013 deadline FIFO Exception: Revolving loan funds 20
Revolving Loan Funds Cannot draw down NSP grant funds to capitalize RLF Exception for lump sum draw down for rehab funds Cannot exceed grant amount needed for specific program Cannot be used solely for investment Admin costs not eligible Work with HUD if want to do this Can deposit PI into RLF for specific eligible purpose Example: homebuyer lending, rental housing acquisition/rehab 21
Revolving Loan Funds (cont) Funds in RLF are exempted from FIFO rule but RLF must actually revolve cannot just park funds Must use funds in RLF for next activity with same purpose as RLF Must be in an interest bearing account Interest on fund remitted to HUD Interest paid by borrowers is PI Set up RLF in DRGR as separate project Each activity must meet national objective 22
Tracking and Using Program Income Must re-use PI for eligible NSP use, as applicable NSP PI must be used for NSP eligible uses meeting a national objective Must also meet all applicable cross cutting other federal requirements (Davis Bacon, environmental, LBP etc) 10% can be used for program administration and planning 23
Tracking and Using Program Income (cont) PI from each program NSP1, NSP2, NSP3 must be tracked separately Must use each according to its program rules NSP1, NSP2, NSP3 program income can be combined in a project IF project meets rules of all applicable programs 24
Tracking and Using Program Income (cont) Income from projects with multiple financing courses is prorated in proportion to investment Example: Total development cost: $100,000 NSP Investment: $60,000 HOME Investment: $10,000 Local money: $30,000 House is sold for $90,000 60% is NSP PI ($54,000); HOME PI is 10%($9,000); and non PI is 30% ($27,000) 25
Tracking and Using Program Income (cont) Incorporate requirements within subrecipient agreements Grantee must determine whether allow subs to keep PI If allow subs to keep PI, must dictate its eligible use If subs keep PI, grantee can continue to draw funds for other activities but sub must use on-hand PI before requesting additional funds Document receipt and use of PI At end of agreement, PI on hand or subsequently received by subrecipient must be returned to grantee unless otherwise specified in agreement 26
Options for Using Program Income Conduct more of same program that generated PI Expand into new/different eligible activity Make sure activity is described in approved Action Plan and activity occurs in identified area of greatest need Could re-fund existing partners or choose new subs, developers etc. 27
Program Income Examples Acquisition and construction costs of $120,000 NSP construction loan paid $70,000 Private construction loan paid $50,000 At closing, house is sold for $90,000 (its market value) Private loan for $50,000 is paid off and $40,000 is repaid to NSP grantee How much is considered NSP PI in this case? $40,000 28
Program Income Examples (cont) Assume that NSP-assisted homebuyer project has 5 year affordability period. Home is sold by assisted homeowner in year 7 and $40,000 NSP soft second loan is repaid to grantee How much is PI? $40,000 29
Program Income Examples (cont) In 2012, assume two homebuyers sold their units and each repaid $10,000 (total $20,000) to subrecipient A. Three homebuyers sold and repaid subrecipient C $10,000 each (total $30,000) How much is PI? $50,000 30
Program Income Examples (cont) Grantee provides $80,000 in NSP funds to developer to assist them to acquire and rehabilitate unit. At sale, developer receives $40,000 of sale proceeds Must $40,000 program income be repaid grantee? No If developer keeps $40,000, is it PI? No but caution on over-subsidy 31
Program Income Examples (cont) Total development costs: $160,000 $90,000 is private loan $70,000 is NSP loan House sells for $130,000 $100,000 is private mortgage $30,000 is soft second loan left in deal by grantee Of $100,000 in private loan proceeds, $90,000 goes into paying back private construction loan and $10,000 comes back to grantee What would be the NSP PI? $10,000 32
Program Income Examples (cont) Total development costs: $120,000 $40,000 is private loan $80,000 is NSP loan House sells for $90,000 and there are $5,000 in closing costs $40,000 construction loan is repaid with sales proceeds, leaving $50,000 Of that $50,000, $5,000 is left in deal to pay closing costs; $45,000 comes back to grantee What is PI? $45,000 33
Program Income and DRGR DRGR does not track first in, first out for program income Grantee must have a system for tracking Program income received Tracked in grantee s quarterly reports on activity that generated it Program income disbursed Tracked in draw-down module on activity for which it was used 34
Program Income: Tracking in DRGR Program Income should be reported in the QPR in the quarter in which it was received. Grantees should enter program income received in the activity it was received under. Once this information is saved in the QPR, grantees will be able to draw down on it when creating a voucher Program Income is drawn down on through the Drawdown module. The protocol is no different than what is done with NSP grant funds Available Program Income is the sum of ALL PI a grantee has generated. The same amount of money will show as being available for every activity in a voucher 35
FinReport: Program Income Activity Level Drawdown QPR 36
Program Income Received: QPR Level Enter Most Current In-Quarter Estimate of Program Income Received Save (not submit) QPR In-Quarter. 37
Program Income Disbursed: Drawdown Module Program Income Disbursements 38
Program Income Disbursed: Drawdown Module PI Shows in Fund Type Enter amount of Program Income Disbursed 39
Drawdown Math Rules: Vouchers Program Fund Available Amount = (Obligated Amount (Drawn Amount + Draw Pending Amount) Program Income Available Amount = Sum of All Program Income Received Drawn Program Income {Reported in the QPR} 40
Case Study = Voucher Math Program Income Received = $304,426 Program Income Drawn = $100,000 Continually increase Program Income Received as it comes into the grantee. Available Amount (in TOTAL) = Program Income Received Drawn Program Income Available Amount to Draw = ($304,426 $100,000) = $204,426 Activity #1: - $154,426 Activity #2: - $ 50,000 In-depth Case Studies on how to common problems with PI in DRGR at the March 29 th Webinar 41
Program Income Common Problems Question 1. How do I demonstrate a Revolving Loan Fund in DRGR? Enter new Activity with $0 Budget. Question 2. I received program income from a Acquisition/Rehabilitation Activity but my next draw is 50% for that Acquisition/Rehabilitation Activity and 50% for Redevelopment. What do I need to do in DRGR? Question 3. My next drawdown is for an Activity that has a capped budget. What do I need to do in DRGR? 42
PI Common Problems. Q2 FinReport: Program Income Activity Level Drawdown QPR 43
PI Common Problem: Q3 First In. First Out. Must disburse funds. Decrease Activity Budget for which the PI was received and Increase the Activity Budget in which the PI is designated for. **Remember: Activity Drawdown + PI Drawdown = Total Activity Draws 44
PI Common Problem: Q3 EHabitatLH25 Draws: $169,001.35 + $35,985.24 = 204,986.59 Decrease EhabitatLH25 Activity Budget $824,000 by PI Draws {$35,985.24} Increase BEDCLMMI by $35,985.24 45
PI Common Problem: Q3 $4,58,839.24 $788,014.76 46
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