BY Nathaniel S. Cushman

Today, HUD issued a notice in the Federal Register covering important Public and Indian Housing program updates, including:

• Updated guidelines and requirements for project-based voucher (PBV) subsidy layering reviews (SLR)
• New PBV Housing Assistance Payments (HAP) contract term provisions from the Housing Opportunity Through Modernization Act of 2016 (HOTMA)
• Updated SLR requirements for mixed-finance projects whether or not they have PBV assistance
• Updated expectations regarding cash flow, debt coverage ratios, net operating income and operating expense trending requirements

By way of background, SLRs are meant to ensure the amount of HUD assistance is not more than necessary to make a PBV project feasible in consideration of other government assistance. SLRs are required prior to the execution of an agreement to enter into a HAP contract (AHAP) if there is other government assistance. Please note, this guidance does not affect HAP contracts renewed under MAHRA and administered by the HUD Multifamily Division.

The notice sets forth the process for an applicant applying for SLR. For a PBV project, the applicant submits the Form HUD 2880 and related documentation to the Public Housing Authority, who can then ask the local HUD Field Office or a Housing Credit Agency (HCA) to process the SLR. For mixed-finance deals, only the HUD Field Office may conduct the review. If at any time, even after the HAP execution, the owner receives supplemental HUD or new government assistance that results in an increase to project financing greater than 10% of the approved SLR development budget, the owner must apprise the PHA and HUD or the HCA in writing. At the time of initial SLR submission, the PHA must also submit evidence that a request for environmental review has been submitted to the field office.

The SLR includes HUD review of the operating and development budgets to determine whether costs are within a reasonable range considering the project size, characteristics, location, financing, and other factors. The notice sets forth safe harbor standards for costs and allows for costs exceeding safe harbor to provide additional justification and HUD approval or if an HCA is conducting the SLR, approval outside safe harbor so long as the costs are consistent with the HCA’s published allocation plan. The notice makes some changes to the existing Safe Harbor standards and also provides additional detail regarding acceptable assumptions and analysis in determining whether Safe Harbor standards are met.

Safe Harbor highlights include:

• GC Fees: up to 14% of hard construction costs
• Developer Fee: up to 15% for PBV contract, up to 9% for PBV in mixed-finance project, up to 12% with justification, over 12% if PHA receives it and is restricted for project’s costs or future phases.
• Debt Coverage Ratio: 1.10 to 1.45, with permitted trending of operating expenses between 1-3% per year, rent increases between 2-3% per year, and vacancy not in excess of 7% per year.
• Cash Flow: may not exceed 10% of total operating expenses, not counting deferred developer fee, operational and replacement reserves (so long as adjusted annually). HUD will reduce PBV rents or the number of PBV in order to facilitate compliance with this provision.
• Mixed Finance: the SLR is handled through the mixed-finance review process in HUD’s Office of Public Housing Investments at HUD HQ and includes Choice Neighborhoods. Mixed-finance projects must comply with the Cost Control and Safe Harbor Standards, dated April 9, 2003, the total development cost and housing construction cost limits in HUD Notice PIH-2011-38, and the HUD pro-rata test. LIHTC pricing cannot be less than 51¢ on the dollar.

The notice also provides a summary of the HCA’s processing of SLRs. HCAs may perform SLRs for proposed PBV projects only if there is LIHTC in the deal. Currently, 29 states have a HUD-approved HCA, and the remaining 21 must seek HUD SLR review.

The notice provides a checklist for the required elements of an SLR application.