On September 29, the US Department of Housing and Urban Development (HUD) and US Department of Agriculture (USDA) announced a new memorandum of understanding (MOU) intended to reduce duplicative federal requirements affecting housing projects that involve both agencies. The MOU focuses primarily on environmental review requirements and physical inspections and could ultimately simplify compliance for affordable housing owners and developers whose properties receive funding or assistance from both HUD and USDA Rural Development (RD).
The MOU implemented Section 802 of the 21st Century ROAD to Housing Act, the Streamlining Rural Housing Act, on July 11, which directed HUD and USDA to establish a framework for greater coordination on environmental reviews and physical inspections.
Importantly, the MOU does not immediately replace existing HUD or USDA requirements. Instead, it establishes a process for the agencies to evaluate and develop potential changes. Owners and developers should therefore continue complying with existing program requirements until HUD or USDA issues implementing guidance, regulations, or other instructions.
What does the MOU address?
The agreement directs HUD and USDA to coordinate in four principal areas.
Environmental review categorical exclusions
HUD and USDA will evaluate the categorical exclusions currently available for housing projects they both fund with the hope of identifying opportunities to align how projects can proceed without a more extensive environmental assessment.
This is intended to reduce the time and administrative work owners and developers spend on environmental review, particularly for preservation, rehabilitation, refinancing, and other transactions that may have relatively limited environmental impacts.
The MOU itself does not create new categorical exclusions. Any changes to HUD categorical exclusions under 24 C.F.R. § 58.35 would still need to go through the standard rulemaking process.
A lead-agency approach for jointly funded projects
The agencies will develop a process for designating a lead agency when a housing project is funded by both HUD and USDA. They also intend to make it easier to adopt environmental impact statements and assessments approved by the other agency.
This could be particularly meaningful for transactions involving multiple federal funding sources. Rather than having both agencies review similar environmental issues independently, one agency’s review could instead satisfy some or all of the other’s requirements.
If implemented effectively, this coordination could reduce duplicative submissions, shorten processing timelines, and provide greater certainty when owners assemble financing packages involving both HUD and USDA resources.
Preservation of HUD Part 58 requirements
The MOU addresses HUD’s environmental review regulations under 24 C.F.R. Part 58. Consistent with the underlying statute, HUD and USDA must comply with the Part 58 regulations as they existed on January 1, 2025, except for changes necessary to amend, add, or remove categorical exclusions through the standard rulemaking process.
This limitation is important and demonstrates that, while the MOU is intended to streamline administration and coordination between the agencies, it does not provide authority to simply eliminate existing environmental requirements.
Potential joint physical inspections
HUD and USDA will consider establishing a joint physical inspection process for properties receiving funding from both agencies, which could eventually be one of the most significant operational changes for property owners resulting from the MOU. As it stands, federally assisted properties may be subject to multiple inspection regimes, creating overlapping compliance obligations and requiring owners and management agents to prepare for separate agency inspections.
A joint inspection framework could allow HUD and USDA to rely on a single inspection or otherwise coordinate inspection requirements. The MOU, however, only directs the agencies to evaluate the feasibility of such a process. It does not currently consolidate inspections or alter an owner’s existing inspection obligations.
What does this mean for affordable housing owners and developers?
The immediate impact of the MOU is limited: existing environmental review, inspection, and other HUD and USDA program requirements remain in place. The longer-term implications, however, could be significant, particularly for rural affordable housing preservation transactions and properties with overlapping federal involvement.
Owners and developers should watch for several developments:
- Faster environmental reviews for mixed HUD/RD transactions. A lead-agency model and greater acceptance of another agency’s environmental documentation could eliminate duplicative reviews and help reduce closing delays.
- Potential expansion or alignment of categorical exclusions. Future rulemaking could allow additional transactions to proceed under a streamlined environmental review process.
- Reduced duplication in property inspections. A joint inspection framework could reduce the number of separate federal inspections at properties subject to both HUD and USDA oversight.
- More opportunities to combine federal resources. Reducing duplicative regulatory processes could make transactions involving both HUD and USDA resources easier to execute, potentially creating more opportunity for recapitalizing and preserving rural affordable housing.
- No immediate change to pending transactions. Owners should not assume that an environmental review completed for one agency will now automatically satisfy the other agency’s requirements, or that a HUD or USDA inspection eliminates an inspection required by the other agency. Until implementing guidance is issued, existing requirements continue to apply.
What comes next?
HUD has been designated to lead the overall interagency coordination effort and tasked with convening meetings with USDA RD. The underlying legislation also requires HUD and USDA to report to Congress within one year of the Streamlining Rural Housing Act’s enactment.
The procedures, guidance, and potentially regulations that translate the MOU’s objectives into changes in day-to-day processing will come next.
Owners and developers with properties involving both HUD and USDA programs should continue following existing agency requirements while monitoring for implementing guidance. In particular, stakeholders pursuing preservation or recapitalization transactions involving USDA Section 515 properties and HUD resources should consider whether future interagency coordination could simplify environmental review or inspection requirements and should build flexibility into transaction timelines to allow agencies to develop their new processes.
Nixon Peabody’s Affordable Housing team can help owners, developers, lenders, and investors evaluate how future HUD and USDA guidance may affect pending and planned transactions, including preservation, recapitalization, environmental review, and inspection-related compliance strategies.