MULTIFAMILY RENTAL HOUSING
RENTAL DEVELOPMENT BASICS
Tool #1
Description: This tool is intended for Community Development Block Grant Disaster Recovery
(CDBG-DR) grantees seeking guidance on using CDBG-DR funds to fund rental projects. It is
designed for projects involving a rehabilitation of an existing multifamily structure using CDBG-DR
funds only or CDBG-DR funds plus FEMA Hazard Mitigation funds. It covers identification of
projects, strategies for evaluating project and owner capacity, and guidance on project financing.
How to Adapt this Document: The tool is adapted from training materials used in the field of
rental development. Grantees should adapt the material to their own programs and circumstances.
When adapting this document, make certain that all materials reflect current CDBG-DR rules and
guidance.
Source of Document: This document was developed and modified for use in the toolkit by
Training & Development Associates.
This document is not an official HUD document and has not been reviewed by HUD counsel. It is
provided for informational purposes only.
For More Information
This resource is part of the Community Development Block Grant Disaster Recovery (CDBG-DR) Toolkits. View all of the Disaster Recovery
Toolkits here: https://www.onecpd.info/resource/2853/cdbg-dr-toolkits.
Community Development Block Grant Disaster Recovery (CDBG-DR) Toolkits are designed to provide general guidance across all types of
disasters (e.g. hurricanes, floods; tornadoes; earthquakes; etc.). CDBG-DR Toolkits are NOT disaster specific. CDBG-DR grant funding for
a disaster or group of disasters is governed by CDBG requirements and any modifications contained in one or more Federal Register Notices
(FRN) applicable to the disaster. Grantees subject to the Disaster Relief Appropriations Act of 2013 (Public Law 113-2) should review all
footnotes for additional applicable citations and guidance.
In addition to the FRN, Toolkit users should review applicable Federal cross-cutting requirements. The FRN, as well as cross-cutting
requirements, are available on the Department’s website.
For additional information about disaster recovery programs, please see your HUD representative.
U.S. Department of Housing and Urban Development
Community Planning and Development, Disaster Recovery and Special Issues Division
Rental Development Basics:
A Primer for Funding Rental Housing Projects
Introduction
This primer provides tools and information for grantees and their partners who are new to
disaster recovery rental housing projects. The information and tools in this packet are basic
materials to help establish a rental housing assistance program for disaster victims.
The Community Development Block Grant (CDBG) Program Rule requires grantees to expend no
less than 70 percent of their grant award for activities which support the recovery of households
at or below 80 percent of Area Median Income (AMI). The Federal Register Notice(s) (FRN(s))
accompanying a Community Development Block Grant-Disaster Recovery (CDBG-DR)
appropriation often modifies the program rule to require grantees to expend no less than 50
percent of their grant award for activities which support the recovery of households at or below
80 percent of AMI. In addition, the FRN will sometimes modify the program rule to allow
expenditures on households up to 120% of AMI
In a disaster, grantees are often faced with a broad mixture of unmet needs which complicate
the grantee’s ability to meet the low- and moderate-income (LMI) requirement. Infrastructure
damage is often located outside an LMI area; single family homes damaged by the disaster may
be located in areas with AMI’s of 80% to 120% or higher; public facility projects and commercial
revitalization projects may have few, if any impacts on LMI households. For the grantee, the
nature of multifamily rental housing provides an opportunity to meet the LMI requirement while
creating greater flexibility within CDBG-DR programs to meet the other unmet needs identified
in the CDBG-DR Action Plan.
Users of this primer might also want to review the full set of Multifamily Rental Toolkit items
available, as some of those are likely to be useful. Tools available include:

Creating a CDBG-DR-Eligible Rental Project. Guidance on the eligibility
considerations and financing methodologies available to the grantee in responding
to a disaster, and

Multifamily Rental RFPs – a sample of a project specific RFP and a non-project
specific RFP.
Project Identification
To find CDBG-DR eligible projects, grantees should utilize the unmet needs assessment process
required for creating the initial CDBG-DR Action Plan. This process allows the grantee to obtain
a first look at proposed rehabilitation and mitigation/resiliency projects that were directly
affected by the disaster. FEMA can provide base information. The grantee should solicit initial
damage reports and cost estimates for projects from private sector owners, non-profit owners,
public housing authorities, and units of local government. The FRN generally requires the
grantees to pay special attention to public housing authorities, transitional housing, and
transitional to permanent housing
In soliciting projects for the unmet needs assessment the grantee should seek a base set of
information including:
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Type of owner (private sector, public housing, non-profit)
Whether or not the owner contacted and registered with FEMA
Project Location
Number of Units
Number of affected units
Number of units targeted at or below 80% of area median income
Relocations or displacement caused by the disaster
Estimated costs of rehabilitation
Whether or not the project is located in an environmentally sensitive area (i.e.: on a
fault line; in a 100 year flood plain, etc.)
Estimated costs of mitigation or resiliency
The unmet needs defined by the Action Plan process provide the grantee with a base roadmap
for both the likely types of rental housing programs which are needed to respond to the disaster
and a rough estimate of the costs to complete
Examples of types of rehabilitation that typically occur in a disaster include
Repair or rehabilitation of buildings and units where the insurance and other benefit
payments did not allow the owner to fully rehabilitate the property;
Repair or rehabilitation of buildings and units where the insurance and other benefit
payments did not allow the owner to fully rehabilitate the property and the property
needs hardening or other mitigation or resiliency measures to mitigate the potential
impact of future disasters;
The relocation of buildings and units where environmental requirements or the
property’s location suggest the new construction of units on a site out of the
environmentally sensitive area is a more feasible option than mitigating in place;
The reconstruction of buildings and units on the same lot in substantially the same
manner. For example, reconstruction may be utilized when the rehabilitation cost
exceeds 75 percent of the after rehabilitation value. The number of housing units on
the lot may not be increased as part of a reconstruction; however, the number of rooms
in a unit may be increased or decreased. The number of housing units on the lot may be
decreased to reduce density; however, a decrease in units may require one to one
replacement. Reconstruction requires an environmental review (cannot be categorically
excluded); green building, energy efficiency, mitigation and/or resiliency measures are
all required
In addition to the directly damaged units the grantee may have a demonstrable need for new
affordable units to increase the overall supply of units in the community.
The unmet needs assessment informs the grantees choice of programmatic activity in the CDBGDR Action Plan. The grantee must also meet the specific requirements of the Federal Register
Notice for the disaster in developing the CDBG-DR Action Plan.
Applications, Requests for Proposals/Qualifications
Once the Action Plan is approved, grantees may use their existing process for issuing Requests
for Proposals (RFPs) / Requests for Qualifications (RFQs). Grantees should review the applicable
FRN for any additional requirements relating to procurement and contracting. Also, grantees
are advised to review similar documents published by other communities as well as any samples
on the One CPD Resource Exchange. Most CDBG-DR project based activities will require a RFP,
while activities supporting pre-development, feasibility, or other services will require a RFQ.
Responses to a damaged housing rental project RFP will be wide ranging, diverse in scope, size,
and applicant type. Typically, grantees can expect three types of CDBG-DR applicants:
1. Partners: Units of local government
2. Owners: Owners of damaged units
3. Developers: Developers who have partnered with an owner or who are seeking funds
for new affordable housing.
Basic recommendations for this process include the following:
1. Encourage owners with no or limited capacity to partner with developers.
2. Share information early and often with owners, developers, and other partners
regarding the rules related to CDBG-DR projects. Be sure to provide guidance on the
duplication of benefit requirements, timeliness requirements, affordability
requirements, and the environmental requirements.
3. The CDBG-DR Program permits grantees and developers to expend program delivery funds
for the work of assessing projects and carrying out feasibility analyses. Grantees may opt to
provide reimbursement for environmental; architectural and engineering; relocation
planning; or other services1. Alternatively, the grantee may use an RFQ process to procure
environmental, architectural, engineering, and other services for all potential applicants.
The flexibility provided by CDBG-DR allows the grantee to assist owners and developers in
realistically assessing damages, costs, and timeframes.
4. An RFP for rental housing projects requires knowledge of both finance and
development. For small owners, these skills may be lacking. Grantees should provide
technical assistance to small owners, which is an eligible CDBG-DR expense.
5. In developing RFPs for rental housing projects the grantee should consider a universal
application with sub applications. The universal application contains the threshold
requirements, while the sub-applications are type specific. A Table is provided in
Appendix 1 to illustrate.
6. In developing the RFPs, the grantee must include the elements defined by the Action
Plan as threshold criteria including:
a. Priority to those projects in areas identified by the Action Plan as the priority
areas;
b. Priority to project types identified by the Action Plan;
c. The definition of affordable rents by unit size; and
d. All cross cutting Federal requirements
7. In developing the RFP/Qualifications the grantee should include additional elements to
assist the grantee in meeting timeliness requirements. Some examples include:
a. Priority to applicants who are ready to proceed;
b. Priority to applicants with leverage (other sources of financing) committed;
c. Priority to applicants that have demonstrated capacity;
d. Priority to applicants who have prior and recent experience in working in a
regulated affordable housing framework, i.e., rent and income limits and other
Federal regulations.
e. Priority to applicants serving LMI populations
1
See the Multifamily Rental Toolkit Non-Project Specific RFQ for two methods of helping developers to package CDBG-DR compliant rental projects.
Evaluate the Applicant
Grantees are advised to review responses to their RFP/RFQ thoroughly to ensure completeness
and compliance. Incomplete applications should be rejected. Key questions for review are listed
below.
Developer/Owner/Partner Capacity
Consider the owner, developer or partner organizational capability to carry out the CDBG-DR
project. The capacity level may be determined by asking the following questions:
 Are there qualified and ready-to-work team members for all roles listed in the
application?
 Is knowledge of CDBG-DR rules and federal regulations indicated by a correct
application and a project plan that reflects full understanding of CDBG-DR,
environmental review, duplication of benefits, relocation and other Federal
requirements?
Evaluate the Project
Readiness to Proceed
In CDBG-DR readiness to proceed has an immediate impact on the grantees ability to meet the
timeliness requirements. To assess the owner, developer, or partners’ readiness, the grantee
should have a clear set of project evaluation criteria. Readiness to proceed may be determined
by asking the following questions:
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Is the project a CDBG-DR eligible project? (Use the “CDBG-DR Eligible Rental
Projects” from the Multifamily Rental Toolkit as a resource.)
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Are all other financing sources committed?
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Is the project timeline realistic?
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Will the applicant be able to generate a commitment and expenditure which will
result in all CDBG-DR funds being expended within the required time period?
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Do plans and specifications meet mitigation, resiliency, green building, and energy
efficiency requirements as applicable?
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Is the duplication of benefits information provided complete and accurate?
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If the project requires relocation, is a URA compliant relocation plan included?
Market Viability
Determine whether the assisted project has the potential to be viable in its market area. Making
such a determination may call for a market study to evaluate supply and demand in the
surrounding area. Market viability may be assessed by asking the following questions:
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Are developer’s projections for rent, vacancy, and unit quality consistent with a
market study or known market information?
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Are market analysis conclusions supported by the evidence presented with regard
to area rents and vacancy rates?
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Are the properties used as market comparables truly comparable in location, unit
size, and amenities, and/or are differences adequately adjusted for?
Property Specific History
Property specific history refers to existing damaged or destroyed rental housing only. Assess the
rental project’s history by collecting and compiling details on the existing rental project’s
operating history. The grantee can learn from past oversights, successes, and mistakes.
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What were the rent rates prior to the disaster?
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What was the vacancy rate prior to the disaster?
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Was the project burdened with high cost debt?
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Were there code citations, tax delinquencies, grantee liens, or other similar
violations prior to the disaster?
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If the project had or has problems or shortcomings, does the developer have a plan
for effectively dealing with the identified issues? Is the plan plausible and
adequately funded?
Financial Viability
Determine the long-term financial viability of the project given the conditions surrounding the
project. An accurate judgment of the project’s future finances may involve the following
considerations:
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Budgeting for realistic property expenses (including quality property management,
property maintenance, and sufficient replacement reserves) is essential to the longterm viability of the project.
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Given rent restrictions, cash flow may decline over time. A 20-year cash flow
projection is important to identify potential shortfalls in future years.
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This primer includes a simple budgeting tool. You will also find a more developed
Multifamily Underwriting Template in the Multifamily Rental Toolkit.
Rents & Tenants Under CDBG-DR
Consider affordable rent levels and eligible tenants. In CDBG-DR, the applicable FRN may define
affordability to allow mixed income projects2. Before the project is ready for tenants to move
in, grantees must consider the following CDBG-DR rules:
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Rents must not exceed the grantee’s definition of “affordable rents” for the full
term of the affordability period.
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All tenants must be income qualified at the time they move in, but do NOT have to
be re-certified annually. A tenant’s income may increase over time without
displacement from the project, but any new tenant moving in to the project must be
income qualified.
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If the project receives subsidies from other sources the rents must reflect the
requirements of the most restrictive source of funding.
Cross-Cutting Federal Requirements
In addition to insuring that the project meets the basic criteria for CDBG-DR eligibility and
readiness, there are other critical federal requirements that must be dealt with immediately on
any project. Details for these first steps are available on the One CPD Resource Exchange. Also
see the “CDBG-DR Eligible Rental Projects” in the CDBG-DR Multifamily Rental Toolkit.
Tenant Protection and Uniform Relocation Act Requirements
Grantees must assure that the Uniform Relocation Act requirements have been followed and
that both displaced occupants and any current occupants of the project are identified. These
2
Mixed income refers to projects where a portion of households are below 80 percent of area median
income (AMI) and a portion of households are above 80 percent of AMI. CDBG requires at least 51% of
the units assisted be at or below 80 percent of AMI. The grantee may seek a waiver to change this
requirement to a proportional investment requirement.
occupants are entitled to advisory services, in the form of notices and counseling, and, possibly,
assistance, under the Uniform Relocation Act. Be sure you know who these occupants are and
maintain records from the inception of the project. Failure to do so can lead to unexpected and
substantial costs and work later.
A variety of tenant protection tools and guidance documents are available on the One CPD
Resource Exchange. To browse through these resources, search keyword “tenant protection.”
Affirmative Marketing Requirements
Grantees may already have an affirmative marketing plan. The applicant should either mirror
the grantee’s plan or develop a plan which exceeds the grantee’s criteria. Grantees should
insure the grantee’s affirmative marketing plan supports the grantee’s Analysis of the
Impediments to Fair Housing.
Environmental Review
Failure to follow the proper Environmental Review procedures can lead to the project later
being deemed ineligible. Be sure that any contract includes the required clauses and that the
proper steps are followed prior to the investment of CDBG-DR funds.
The Environmental Review process is the responsibility of the CDBG-DR grantee, however, the
applicant may be asked to provide information regarding specific features or characteristics
regarding the property, including its history, past uses and the scope of the proposed
redevelopment, renovations, or remodeling.
A variety of environmental review tools and guidance documents are available on the One CPD
Resource Exchange. To browse through these resources, search keyword “environmental review.”
Structure Project Financing
Project financing must take into account the projected operating expenses, the ability to repay
debt attached to the project, and the likely cash flow from the project. The grantee has wide
discretion in project financing. The financial structure should reflect the realities of the CDBGDR project.
Basic Strategies
In CDBG-DR eligible projects, the current financing structure should be taken into account in
designing the CDBG-DR financing structure.
In most affordable housing scenarios, it is desirable for the developer to secure a conventional
first mortgage in the greatest amount feasible; however, that is not necessarily the best strategy
for CDBG-DR projects. Applicants may already have a first and/or second mortgage, so the
grantee should be prepared to accept a lower lien position and repayment terms which are
either cash flow based or due on sale or refinance. Alternatively, the grantee may assist the
applicant in a refinancing of the project to reduce the monthly cost of the overall debt and to
increase the affordability of the units. In effect, the grantee can become the first mortgage
lender.
For smaller projects (less than 12 units), where the grantee is in a second or lower position, an
affordability period coupled with a due on sale and refinance clause reduces the administrative
burden for the grantee
For projects assisted with significant leverage including low income housing tax credits, state
housing tax credits, or housing bonds, the grantee is likely to have a very small proportion of the
overall debt and should structure the grantee’s portion as a forgivable loan or grant. Projects
leveraged with tax credits and/or bonds carry significant affordability restrictions which permit
the grantee to rely on others for affordability compliance. The result is to reduce the grantees
administrative burden.
For projects requiring the relocation of units out of an environmentally sensitive area, the
grantee should consider the disposition of the property where the units were originally located
in the financing structure. For example, a waterfront development which is relocated to an area
outside of the 100 year flood plain does not require a buyout by the grantee. The property may
be sold at public auction or through a sealed bid process. The grantee can require the resulting
funds be distributed in accordance with the current debt on the property with any residual
funds or a proportion of residual funds being returned to the grantee or utilized to reduce the
CDBG-DR investment in the relocated units.
For projects in an environmentally sensitive area where mitigation and resiliency will be utilized,
the grantee should work closely with FEMA to leverage CDBG-DR with the appropriate Hazard
Mitigation Assistance (HMA). The HMA programs can pay up to 75 percent of the eligible
mitigation and resiliency eligible costs.
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The Multifamily Rental Toolkit contains an underwriting template with the
functionality needed for more complex projects.
Additional Subsidy
There are often situations where the first mortgage debt and a second mortgage provided by
CDBG-DR do not fully fund the project. The balance needed may be funded with a third or lower
position CDBG-DR mortgage with characteristics of either a cash flow loan or a due on sale or
refinance loan. CDBG-DR funds can be used to fund an additional mortgage for the entire
difference between the first mortgage and the post-renovation appraised value as long as all
units meet CDBG-DR criteria.
Payment Options
The grantee should execute a note and a mortgage to secure repayment of their investment of
CDBG-DR funds. There are three main options for repayment that a CDBG-DR grantee could use
for a project: annual cash flow, required monthly, or fully forgivable/due on sale.
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Annual Cash Flow Payment
o
Grantee can require a percentage share of annual cash flow based on an annual
project audit. Before entering into a cash flow loan agreement the grantee
should work with the developer to define cash flow;
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The two most likely options for sharing cash flow are:
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One-third grantee and two-thirds owner
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Half grantee and half owner
Such sharing is reasonable because it gives the developer some incentive to
generate cash flow while still generating a potentially significant repayment to
the grantee.
Required Monthly Payments
o
If the grantee is the first mortgage lender, the grantee should require monthly
payments unless the project is primarily targeted at very (50% of AMI) or
extremely low income households (30% of AMI). In cases of deep targeting a
fixed mortgage payment may not be a workable solution.
o
Monthly payments are not recommended on most second mortgages as
tracking and administering the loan can be a relatively large administrative
burden for a relatively small return of funds. If the grantee chooses to require
second mortgage payments, the grantee should be careful to maintain a 1.2
debt coverage (including the second mortgage) to insure project viability over
the affordability period;
Fully Forgivable/Due on Sale
o
CDBG-DR does not require the grantee to receive any repayment. The Grantee
may choose to make the second mortgage fully forgivable over the term of the
loan, with any remaining balance due if the property is sold before the end of
the term or if the property fails to comply with CDBG-DR requirements.
o
A typical forgiveness structure might involve no forgiveness for 10 years and
then 10 percent per year for the following 10 years.
Interest Rate
The decision to charge interest should be based on a variety of factors. If the grantee plans to
implement a forgiveness structure, then charging interest is probably unnecessary. If a grantee
plans to require repayment, it might consider charging an interest rate that balances the need
for program income, the capacity of the project to make payments, and the owner’s need for a
positive equity position.
Term of Affordability Commitment
CDBG-DR does not require a term of affordability. The grantee may and should impose
affordability restrictions which match the level of investment of CDBG-DR funds. The grantee
may impose a longer term, which can be recorded and enforced beyond the mortgage
repayment. Longer terms help maintain the availability of the affordable units. The following
are common examples and suggested strategies for affordability commitments:
Overview:
The grantee may establish benchmarks for affordability periods based on the amount of CDBGDR funds invested on a per unit basis or a project basis. The grantee may choose to use an
existing set of affordability periods such as the HOME program rule, or alternatively, the grantee
may determine the affordability period on a project by project basis.
Fixed Payment First and Second Mortgages
If the grantee will provide a first or second mortgage with a fixed payment, the term of
affordability should be at least equal to the term of the mortgage. The grantee may also include
a refinance provision, requiring the owner to repay the first mortgage in any refinancing. The
refinance provision insures the owner will not be able to dilute the project’s ability to repay the
grantees note.
Forgivable and Due on Sale Mortgages
There are numerous instances where a forgivable mortgage with a due on sale or refinance
clause is the most effective financing structure available. The term of affordability should mirror
an equivalent period such as the first mortgage lien or other subsidy liens. When no other liens
exist, the minimum affordability period should be twenty years, which is considered the useful
life before a rental project will need rehabilitation.
Funding Agreements
In addition to a standard mortgage and promissory note to secure repayment of the CDBG-DR
funds, grantees will find it helpful to execute a funding agreement with all of the particulars of
the specific project. A sample project-specific written agreement is available in the Multifamily
Rental Toolkit as well as several sample legal documents. It is essential that the funding
agreements and legal documents reflect all the performance and compliance requirements for
your project, so that any meaningful change requires approval and all requirements are
enforceable on the developer and/or the property, including but not limited to:
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Project budget
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Project description, unit type, design, construction standards
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Rent schedule
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Affordability requirements
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Lease requirements
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Tenant selection criteria
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Compliance with state and local tenant-landlord laws
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Conditions for faith-based organizations
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Lead-Based Paint requirements
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Fair housing and equal opportunity provisions
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Fund disbursement
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Record keeping and reporting provisions
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Enforcement provisions
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Procedures for securing rent increases
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Compliance requirements, including the monitoring checklist that will be used
Appendix 1:
Table 1provides an overview of how Universal Application can be structured.
Table 1: Universal Application Sub-Applications
Rehabilitation of
Rehabilitation of
Rehabilitation
Construction of
New
Units less than
Units more than
with Mitigation
Destroyed Units
Construction
51% damaged
51% damaged
and/or Resiliency
on a New Site
Threshold
Threshold
Threshold
Threshold
Threshold
Eligibility
Eligibility
Eligibility
Eligibility
Eligibility
National
National
National
National
National
Objective
Objective
Objective
Objective
Objective
Financial
Financial
Financial
Financial
Financial
Feasibility
Feasibility
Feasibility
Feasibility
Feasibility
Long Term
Long Term
Long Term
Long Term
Long Term
Viability
Viability
Viability
Viability
Viability
Cross Cutting
Cross Cutting
Cross Cutting
Cross Cutting
Cross Cutting
Federal
Federal
Federal
Federal
Federal
Owner/Developer Owner/Developer Owner/Developer Owner/Developer Owner/Developer
Capacity
Type Specific
Capacity
Type Specific
Capacity
Type Specific
Capacity
Type Specific
Capacity
Type Specific
Green Building
Mitigation
Demolition
Land Acquisition
Energy Efficiency
Resiliency
Land Acquisition
New Construction
Green Building
New Construction Green Building
Energy Efficiency
Green Building
Energy Efficiency
Property
Disposition
Energy Efficiency