MULTIFAMILY RENTAL HOUSING
CREATING ELIGIBLE RENTAL PROJECTS
Tool #2
Description: This resource is intended for Community Development Block Grant Disaster Recovery
(CDBG-DR) grantees developing, rehabilitating or relocating multifamily rental projects in response
to a disaster. It contains a general discussion on determining the eligibility of rental projects with
references to relevant rules and regulations, definitions, and more. Topic areas include property
size, location, and elevation; relocation; low- and moderate-income benefit; leveraging;
affordability and long-term viability; affordability periods; eligible uses for mixed-income projects;
and funding types.
How to Adapt this Document: This guidance is not represented to be a complete resource, and
CDBG-DR grantees must consider each project’s characteristics, reference any grantee-specific or
project-specific requirements and adapt the guidance to their particular disaster recovery program.
Source of Document: This document was shaped from various CDBG-DR guidance documents and
technical assistance tools used in the field by Training and Development Associates. It 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 crosscutting 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
Creating Eligible Rental Projects
In General
The Housing and Community Development Act of 1974, and the CDBG regulations, as modified by
the Federal Register Notice(s) (FRN) applicable to the disaster, establish activities eligible for
CDBG-DR funding. In regard to multifamily rental housing, the rehabilitation of damaged units,
mitigation of units damaged and determined to be in environmentally sensitive areas (for
example: 100 year flood plain), reconstruction of units, resiliency measures for damaged units,
new construction of units and the relocation of units out of an environmentally sensitive area are
generally eligible activities. All multifamily units must have actual damage or be a demonstrable
response to an impact of the disaster.
The Modified Program Rule
The CDBG program rule requires 70 percent of CDBG grant funds to be expended in support of
beneficiaries who have incomes at or below 80 percent of Area Median Income (“AMI”). A FRN
applicable to the grantee’s disaster may reduce this requirement. Typically, a FRN will reduce the
program rule so that 50 percent of the grant award must benefit persons with incomes at or
below 80 percent of AMI1.
The wide varieties of eligible rental housing activities coupled with the modified Program Rule
provide the grantee with flexibility in design and implementation of multifamily disaster recovery
programs.
Eligible Project Types
The range of eligible rental housing projects that can be completed under CDBG-DR is significant.
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Reductions below 50% require the grantee document and apply for a waiver
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Table 1 provides a summary of the most common with the applicable rules:
Type
National
Objective
Applies
Environmental
Review
Applies
Compliance
Period
Applies2
Documented
Damage/Impact
Attributable to
Event
Duplication
of Benefits
Applies
Repair of Damaged
Units
Rehabilitation of
Damaged Units
Demolition and
Relocation of Units
New Construction
of Units
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
Eligibility Requirements
As noted in Table 1, the eligibility requirements for multifamily property include:
National Objective
Each CDBG-DR assisted project must meet a national objective. Most often, a multifamily rental
project will meet the low- and moderate-income (LMI) national objective. For a structure with
two dwelling units, the LMI national objective requires at least one unit to be occupied (upon
completion) by a LMI household (i.e., at or below 80% AMI). If the structure contains more than
two dwelling units, at least 51% of the units must be occupied by a LMI household. Grantees may
fund “mixed income” projects, but only to the extent of the owner’s willingness to apply national
objective rules to all units assisted.
Environmental Review
All applicable Environmental Review Requirements must be met. These include State and or local
environmental requirements. The most stringent environmental rule applies, whether Federal,
State or Local.
Compliance Period
CDBG-DR grantees are highly encouraged to ensure CDBG-DR assisted multifamily rental
2
Although no statutory or regulatory compliance period under CDBG, grantees are strongly encouraged to adapt an
affordability period relative to the amount of CDBG-DR assistance provided.
2
properties have units that remain affordable over a period of time. Oftentimes, grantees will
place a lien on the property for a period equal to other equivalent debt. For example, a
multifamily property with a 15-year public lender lien might also have a 15-year CDBG-DR lien.
However, the grantee has wide discretion as long as policies are documented, meet Office of
Management and Budget (OMB) cost reasonableness requirements, and are consistently applied.
HUD has consistently encouraged grantees to utilize loans and liens in providing CDBG-DR funds
to multifamily owners and developers to both support local affordability and to ensure the owner
or developer does not receive an “inordinate profit”. (See Terms & Conditions)
Documented Damage/Impact Attributable to the Disaster
CDBG-DR appropriation laws require a direct relationship between the disaster and the
multifamily project to be undertaken. In cases of damage, photographs, work write-ups and
supporting documentation is acceptable. However, an impact attributable to the disaster can
take on a number of forms. The most common form is an increased occupancy rate in multifamily
housing, and/or a shortage of housing, caused by displaced homeowners entering the rental
market at the same time that a portion of the multifamily market has been severely damaged or
destroyed. The result is often a lack of suitable housing, accompanied by an increase in rents at
all levels of the housing market. As rents rise, LMI households become increasingly rent burdened
or priced out of the market. These impacts are directly attributable to the disaster and will be
documented and described as an unmet need in the Action Plan.
Duplication of Benefits
A duplication of benefits analysis must be conducted for each project to ensure CDBG-DR funds
do not duplicate funds provided from another source.
The applicant and the grantee must
document all sources of funds provided for the project—including (but not limited to):
1. FEMA payments;
2. Private Insurance Payments;
3. Grants; and/or
4. Any other source of funds dedicated to the multifamily housing project.
Preparedness and Mitigation
All CDBG-DR activities must respond to the impacts of the declared disaster. HUD strongly
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encourages grantees to incorporate preparedness and mitigation measures into all rebuilding
activities, which helps to ensure that communities recover to be safer, stronger, and more
resilient. For example, grantees are strongly encouraged to elevate properties located within a
floodplain (even if not required by law or a FRN)3.
Mitigation measures that are not
incorporated into rebuilding activities may be more difficult to fund with CDBG-DR. However,
FEMA offers five programs targeted at mitigation, known collectively as Hazard Mitigation
Assistance. CDBG-DR can be utilized to leverage FEMA provided funds to the extent permitted
by both programs4. Grantees should either encourage or require potential multifamily owners
who sustained damage to property to register with FEMA during the applicable FEMA
assessment period.
Eligible Entities
Rental housing properties may be owned or developed by the Grantee, individuals, non-profit
organizations, for-profit organizations and Public Housing Authorities.
Eligible Properties
Eligible properties range from single structures to large complexes, including properties held by
state housing authorities or public housing authorities.
Property Size
Rental strategies may be targeted at small rental properties (1-4 units) or large rental
properties (5 or more units), or a combination of both.
Funding Considerations
CDBG-DR funds are limited and may not cover the entire cost of the damages caused to all
multifamily housing affected by the disaster. The grantee will need to establish evaluative and
underwriting criteria for rental housing applicants. The following are criteria that the grantee
should include in funding considerations:
Affordability
Affordability is determined by each grantee, and may vary depending on the types of projects.
3
Note that grantees in receipt of funds under Public Law 113-2 are subject to the elevation requirements described in
HUD’s FRN published April 19, 2013 (78 FR 23578).
4
See FEMA Hazard Mitigation Grant Program (HMGP) Unified Guidance for details of how the FEMA programs work.
4
The grantee may establish broad and flexible affordability requirements or tight and specific
affordability requirements.
Typically, the grantee’s Action Plan will include affordability
requirements depending on a project’s size (i.e., the number of units). The grantee must
determine the length of the compliance period, how compliance with affordability restrictions will
be enforced, and how the developer or owner will be monitored during the compliance period.
Feasibility
The feasibility of any given multifamily project should be a primary consideration for the grantee.
Feasibility is affected by a number of factors including damage, local codes, the property’s
location, mitigation, and the financial viability of the property during the compliance period. For
multifamily projects where mitigation is required, the costs of mitigation may significantly affect
the overall cost of rehabilitation. In these instances, the grantee may determine the more cost
effective approach is to build new units in area where mitigation will not be required rather than
rehabilitate the existing units. Grantees should evaluate feasibility early in the assessment
process in order to better assess effective options.
Leverage
HUD strongly encourages its grantees to leverage CDBG-DR funds to the greatest extent practical.
For example, multifamily projects typically involve numerous revenue streams, and a grantee
could require leveraging through its eligibility criteria. Other forms of assistance include housing
bonds, FEMA funds, other State and local sources, and/or Low Income Housing Tax Credits. While
leveraging can also be critical to the underwriting process (and the viability of a large project),
HUD recognizes that it may not be feasible, or desirable, in all cases.
Timeliness
CDBG-DR funds may require expenditure within a certain amount of time5.
Regardless,
multifamily housing often requires a significant lead time for feasibility, environmental
requirements, architectural and engineering designs, and securing the financing.
Thus, the
development cycle for new construction averages two years. In cases where elevation is chosen,
5
Public Law 113-2 requires commitment and expenditure within two years
5
or where Public Housing projects must go through a disposition process, the redevelopment cycle
can extend an additional year. For these reasons grantees should pay special attention to project
scale, readiness to proceed, and developer/owner capacity.
Where HUD does not require
expenditure within a certain timeframe, the grantee should implement its own schedule.
Underwriting
The grantee will be required to underwrite each project to ensure the OMB standard of cost
reasonableness is met. Underwriting should be based on fixed criteria with variations for special
circumstances or conditions.
The threshold requirements include all of the base eligibility
requirements outlined above6, all Federal cross cutting requirements, owner/developer capacity,
plus financial feasibility and long term viability. Prior disaster recovery efforts suggest a grantee is
successful utilizing a single “universal application” to establish threshold requirements. Once the
threshold is met, a set of attachments can allow the grantee underwrite the specific project type.
Forms of Assistance
CDBG-DR permits all of the forms of assistance available in CDBG, including the use of grants,
loans, loan guarantees, and interest rate subsidies. Grantees should be flexible in structuring
CDBG-DR to meet the local conditions and need. For example, a twenty-unit project might have
difficulty adding to an existing first mortgage at an 8 percent interest rate. To alleviate the
situation, the grantee could act as first mortgage lender at a 4 percent rate, thereby increasing the
borrower’s ability to repay. If additional funds are needed, the grantee could also offer a second
mortgage of CDBG-DR funds as a cash flow loan, soft loan or grant. The grantee benefits by
maintaining as much programmatic flexibility as possible.
Grants:
In CDBG-DR, grants are typically utilized in situations where:

There is little or no likelihood of repayment;

The rental housing cannot support any further debt and refinance is not an option; and

The subsidy amount is small.
The rehabilitation of small or large rental housing projects which cannot support further debt may
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Eligibility Requirements
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require the grantee to provide all or a portion of the CDBG-DR assistance as a grant. For example,
many small rental housing projects cannot support further debt. In other cases, minor costs of
repair or rehabilitation (e.g., under $10,000) may create more of a cost-burden to the grantee if
the assistance is structured as a loan. Before providing CDBG-DR funds in the form of a grant, a
grantee should underwrite the project and utilize a forgiveness provision coupled with a balance
due on sale clause during the compliance period (if any) to ensure the property is not “flipped” by
the owner for a quick profit.
Loans: Soft Loan
Most grantees will provide CDBG-DR funds to a rental housing project in the form of a
subordinated soft loan. Soft loans come in many different forms including:

Loans with no interest rate, interest payment or principal payment, where the principal
is forgiven over time, also known as forgivable loans;

Loans with a principal payment only;

Loans with an interest payment only, with principal forgiven over a compliance period;

Loans with a due on sale clause, where repayment only occurs if the property is sold;
and

Loans with an interest rate; accrued interest, and a due on sale clause.
The variations are endless. Soft loans may be tailored to a specific project or established
through a basic set of criteria. The grantee should underwrite the project, consider local
financial conditions (availability of funds), and the overall financial environment in designing
project specific soft loans.
Loans: Amortized
The grantee can provide an amortized loan (either a first mortgage or subordinated mortgage)
with a fixed interest rate and term with monthly payments. Amortized loans are often offered
in situations where the current first mortgage debt is a small percentage of the net operating
income, or there is no first mortgage debt. Alternatively, subordinated amortized mortgages
are offered when the project will support debt in excess of the first mortgage. The grantee has
discretion over the interest rate/term, and may tailor the loans to the rental housing project.
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Loans: Cash Flow
In some cases, a project’s long term financial viability is dependent on low cash flow for an
initial period, followed by a gradual increase in cash flow over time. These projects benefit from
a cash flow loan. In a cash flow loan the owner/developer pays a portion of the residual cash
flow (Income less expenses and debt = cash flow) to the grantee on an annual basis provided
certain criteria are met. Cash flow loans are also utilized when the level of cash flow is
uncertain and the rental housing project has rents targeting households at or below 50% of
AMI.
Interest Rate Subsidies
Interest rate subsidies provide a methodology for reducing the interest rate provided by a
private sector lender. For example, a private sector lender might offer an interest rate of 6%
over fifteen years, but permit the borrower to “buy-down” the long term rate by paying “points”.
A point, 1 percent of the loan amount, is a form of interest pre-payment. The grantee can assist
the rental housing borrower by paying the points necessary to reduce the long term rate. The
lender might offer a 4.75% rate if the borrower pays three points at loan closing on a $5 million
loan. Three points totals $150,000 in interest rate subsidy by the grantee, while the monthly
payment on the note is lowered by approximately $3,000 per month.
Loan Guarantees
Loan guarantees allow a grantee to encourage private sector lenders to participate in a high risk
lending situations.
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