Arkansas Administrative Code
Agency 109 - Arkansas Development Finance Authority
Division 03 - Single Family Housing
Rule 109.03.14-001 - HOME Investment Partnership Policy 2014

The HOME Program was created by the National Affordable Housing Act of 1990 (NAHA), and has been amended several times by subsequent legislation. It is the largest Federal block grant available to communities to create affordable housing.

* Objectives: The intent of the HOME Program is to:

> Increase the supply of decent affordable housing to lower-income households,

> Expand the capacity of nonprofit housing providers,

> Strengthen the ability of state and local governments to provide housing, and

> Leverage private-sector participation.

* Regulations: The HOME Program regulations are found at 24 CFR Part 92 and the 2013 HOME Final Rule was published on July 24, 2013. Relevant regulatory citations are provided throughout this manual.

ALLOCATION OF FUNDS

HOME funds are allocated annually by formula to State and local governments by HUD. The State of Arkansas receives funds through this formula and ADFA is the agency that administers funds allocated to the State. Under the HOME Program, ADFA is designated a "Participating Jurisdiction" or "PJ". The local PJs in Arkansas include the Cities of Fort Smith, Little Rock, North Little Rock, and Pine Bluff.

In turn, ADFA allocates funds to various partners through their formal application process. ADFA is subject to several HOME Program requirements when allocating funds to other entities and these requirements affect the way HOME program Recipients run their programs as well.

. Timeframes. HOME Rules require ADFA to commit and spend its funds within certain timeframes.

> PJs have 24 months to enter into written agreements with developers, owners, contractors, Subrecipients, State Recipients and Community Housing Development Organizations (CHDOs, a type of nonprofit housing organization) to commit HOME funds and four years to expend HOME funds. PJs that do not meet these timeframes risk losing their HOME funds.

> Given these requirements, ADFA has created its own timeline for HOME program Recipients. Recipients must disburse:

^ 25 percent of the total HOME Program funds within 90 days; and

^ 75 percent within one year from the date of the notice to proceed.

. Limits per applicant. ADFA has set the following parameters regarding the amount of HOME Program funds that can be allocated per applicant: Note: ADFA Board of Directors reserve the right to increase or decrease the maximum program allocation during the program year to meet HOME program requirements. All allocations are subject to availability of funds.

> Applicants must request a minimum of $100,000 in HOME Program funds to be considered for a HOME Program allocation (with the exception of TBRA projects).

> The maximum amount that can be requested and allocated by ADFA is $450,000 in HOME Program funds, subject to availability of funds (Note: The maximum allocation for a CHDO projects is $900,000, subject to the availability of funds).

> The maximum amount that can be requested and allocated for TBRA projects by ADFA is $225,000, subject to availability of funds.

> TBRA applicants may apply for funding once a year and when 75% of the current allocation has been expended.

> Recipients may have a maximum of three approved HOME projects, per housing activity (Rental, Homeowner, TBRA), per HOME Fiscal year (July 1 to June 30) based upon capacity as determined by ADFA.

. Uses of funds. The HOME Program and ADFA place the following limits on uses of fund:

> Planning and Administration. Applicants may use up to 10 percent of their HOME Program allocation for a consultant fee and/or project delivery costs. (See Chapter 2: Administrative Overview and Management for more information).

> CHDOS. ADFA must reserve a minimum of 15 percent of its annual allocation for activities undertaken by qualified Community Housing Development Organizations (CHDOs). (See Chapter 8 for more information on CHDOs.)

HOME-FUNDED ACTIVITIES

HOME funds can be used to support four general affordable housing activities.

. Homeowner rehabilitation: HOME funds may be used to assist existing owner-occupants with the repair, rehabilitation or reconstruction of their homes. (See Chapter 4 Homeowner Housing - Owner Occupied Housing for more information.)

. Homebuyer activities: HOME funds can be used to finance the acquisition and/or rehabilitation or new construction of homes for homebuyers. (See Chapter 5 Homeowner Housing -- Homebuyer for more information.)

. Rental housing: Affordable rental housing may be acquired and/or rehabilitated, or constructed. (See Chapter 6 Rental Housing Program for more information.)

. Tenant-based rental assistance (TBRA): Financial assistance for rent, security deposits and, under certain conditions, utility deposits may be provided to tenants. Assistance for utility deposits may only be provided in conjunction with a TBRA security deposit or monthly rental assistance program. (See Chapter 7 TBRA for more information.)

Eligible Activities

Homeowner Rehabilitation Activities

- see chapter 4

Homebuyer Activities - see chapter 5

Rental Housing Activities - see chapter 6

TBRA - see chapter 7

ADFA HOME PROGRAM ROLES AND RELATIONSHIPS

ADFA relies on numerous partners to create affordable housing under its HOME program. Partners play different roles at different times, depending upon the project or activity being undertaken.

. ADFA: As a State PJ, ADFA has broad discretion in administering HOME funds. ADFA may administer activities directly, allocate funds to units of local government directly, evaluate and fund projects, or combine the two approaches.

. State Recipients: ADFA may allocate funds to units of general local government, including cities, towns, townships and counties. The funds are then administered by local governments for eligible HOME uses.

. Local PJs. Local PJs are units of local government who received a HOME allocation directly from HUD. ADFA may undertake jointly-funded projects with local PJs and may use HOME funds anywhere within the State including within the boundaries of local PJs. ADFA HOME Program funds allocated within a designated local PJ will be limited to down payment and closing costs assistance loans, CHDO Set-Aside projects, and joint Low-Income Housing Tax Credit/HOME developments.

. CHDOs: A CHDO is a private, nonprofit organization that meets a series of qualifications prescribed in the HOME regulations. Each PJ, including ADFA, must use a minimum of 15 percent of its annual allocation for housing owned, developed or sponsored by CHDOs. PJs evaluate organizations' qualifications and designate them as CHDOs. CHDOs also may be involved in the program as Subrecipients, but the use of HOME funds in this capacity is not counted toward the 15 percent set-aside. See Chapter 8 of this manual for more information.

. Subrecipients: A Subrecipient is a public agency or nonprofit organization selected by a PJ to administer all or a portion of the PJ's HOME Program. It may or may not also qualify as a CHDO. A public agency or nonprofit organization that receives HOME funds solely as a developer or owner of housing is not considered a Subrecipient.

. Developers, owners and sponsors: Individuals, for-profit entities and nonprofits can participate in the HOME Program as owners, developers or sponsors of housing. When CHDOs use HOME funds as owners, developers or sponsors, this use of HOME funds counts toward the 15 percent CHDO set-aside.

. Private lenders: One of the goals of the HOME Program is to establish strong public/private partnerships. PJs are required to make all reasonable efforts to maximize participation by private lenders and other members of the private sector. The Community Reinvestment Act (CRA) requirements provide an incentive to private lending institutions to become involved in HOME Program activities.

. Faith based organizations: Faith-based or religious organizations are now able to compete on an equal footing with other organizations for HUD funding. Funding may be provided directly to any Recipient, as long as those funds are not used to support inherently religious activities. As of the September 30, 2003 Final Rule for 24 CFR Part 92, HUD identified regulations for eight programs, including the HOME Program, to eliminate barriers and ensure that these programs are open to all qualified organizations regardless of their religious character.

. Third-party contractors: A PJ may contract with a private for-profit contractor to administer all or part of its HOME Program. Unlike public agencies or nonprofits, contractors must be procured through a competitive process in accordance with applicable Office of Management and Budget (OMB) procurement requirements. These requirements are found in 24 CFR Part 85 (for PJs) and Part 84 (for nonprofits).

OTHER HOME REQUIREMENTS

When a PJ accepts HOME funds, it agrees to meet certain obligations. ADFA passes along many of these requirements to its Recipients.

Matching Requirement [92.218-92.222]

. Each PJ incurs a 25 percent matching obligation for HOME funds it expends. Currently, the State of Arkansas has a 50 percent match reduction from HUD, which requires ADFA to meet a 12.5 percent matching obligation for HOME funds expended. ADFA imposes a 12.5 percent matching obligation on its HOME Program Recipients for all activities except TBRA and homebuyer down payment assistance. Chapter 14 provides further details on ADFA match requirements.

. Matching contributions must be:

> A permanent contribution to affordable housing;

> From non-Federal sources; and

> Provided by any of a broad array of public and private donors, such as local government agencies, state agencies, charitable organizations/foundations, and private sector organizations such as lending institutions and corporate donors.

Maximum Per-Unit Subsidy Amount [92.250]

. The total amount of HOME funds and ADDI funds that ADFA may invest on a per-unit basis in affordable housing may not exceed the per-unit dollar limitations established under section 221(d)(3)(ii) of the National Housing Act ( 12 U.S.C. 1715(d)(3)(ii) ) for elevator-type projects that apply to the area in which the housing is located. HUD will allow the per-unit subsidy amount to be increased on a program-wide basis to an amount, up to 240% of the original per unit limits, to the extent that the costs of multifamily housing construction exceed the section 211(d)(3)(ii) limit.

Monitoring, Record-keeping and Reporting [92.508 and 92.509]

. As a HOME PJ, ADFA is required to keep records that enable HUD to determine whether they have met program and project requirements. ADFA is also responsible for enforcing these requirements with all its HOME Program Recipients. Monitoring and record-keeping requirements are outlined in Chapter 9: Recordkeeping, Reporting, and Monitoring of this manual.

. AFDA must also submit an annual performance report to HUD known as the Consolidated Annual Performance and Evaluation Report (CAPER.) ADFA requires that all Recipients meet certain reporting obligations to assist with this annual responsibility. (See Chapter 9: Recordkeeping, Reporting, and Monitoring for further information on reporting requirements.)

HOME PROGRAM

As described in Part I of this chapter, ADFA allocates funds to Recipients who in turn develop eligible HOME projects. Part II of this chapter outlines a variety of general requirements all HOME Program Recipients need to follow and comply with when administering a HOME project. The following two definitions are critical to understanding the requirements that are outlined in the following sections.

* Project means a site or sites together with any building (including manufactured housing unit) or buildings located on the site(s) under common ownership, management and financing, to be assisted with HOME funds as a single undertaking. The "project" includes all of the activities associated with the site and building. For tenant-based rental assistance (TBRA), "project" means assistance to one or more families.

* HOME-Assisted Units: The HOME Program distinguishes between the units in a project that have been assisted with HOME funds and those that have not -- hence the term HOME-assisted unit This distinction between HOME-assisted and unassisted units allows HOME funds to be spent on mixed-income projects while still targeting HOME dollars only to income-eligible households.

THE SUBSIDY

The HOME Program outlines eligible forms of subsidy as well as subsidy limits.

Eligible Forms of Subsidy

* The HOME Program regulations allows virtually any form of financial assistance, or subsidy, to be provided for eligible projects and to eligible beneficiaries, though the participating jurisdiction (in this case ADFA) decides what forms of assistance it will provide.

* ADFA HOME Program allocations to Recipients for the Rental Housing Program and the Homeowner Program and allocations to nonprofit entities, for-profit entities and CHDO activities will be in the form of repayable or forgivable loans. Allocations for TBRA programs will be in the form of grants. These forms of subsidy, as well as the other forms that are eligible under the HOME regulation are outlined below:

> Interest bearing loans or advances: These loans are amortizing loans. Repayment is expected on a regular basis, usually monthly, so that over a fixed period of time, all of the principal and interest is repaid.

^ Such loans may have interest rates at or below the prevailing market rate. Often, very low interest rates (i.e., one to three percent) can make monthly payments affordable to the borrower.

^ The property or some other assets are used as collateral.

^ The term of the loan may vary. For home purchase, a term of up to 30 years is common while rehabilitation and construction loans tend to have terms of 10 to 15 years.

> Non-interest-bearing loans or advances: The principal amount of such loans is paid back on a regular basis over time, but no interest is charged.

^ As with interest-bearing loans, these loans will use the property or other assets as collateral and the term of the loan will vary depending on the nature of the activity funded.

^ Such loans are made when the borrower is able to make regular payments but even a small amount of interest is not affordable.

> Deferred loans (forgivable or repayable): These loans are not fully amortized. Instead, some, or even all, principal and interest payments are deferred to some point in the future. Deferred loans can be structured in many different ways.

^ Deferred payment loans can be forgivable or repayable.

^ If forgivable, the forgiveness might be structured to occur at one point in time (such as at the end of the affordability period), or forgiven incrementally (such as forgiving one-fifth of the loan each year over five years).

^ If repayable, repayment might be required at the sale or transfer of the property or at the end of a fixed period of time.

^ Like the amortizing loans discussed above, these loans can accrue interest or be non-interest bearing.

^ Deferred payment loans require the property or some other form of collateral to be used as security for repayments.

^ Deferred payment loans are also referred to as "soft seconds." They are increasingly being used to leverage private first mortgage financing in homeownership. They may also be used to help rental projects by allowing deferral of loan payments for the first few years until the project becomes stable.

> Grants: Grants are provided with no requirement or expectation of repayment.

^ Grants require no liens on the property or other assets.

^ They are most commonly used for downpayment and closing cost assistance in homebuyer programs or to provide assistance to very low-income owner-occupants for rehabilitation; however, ADFA currently provides down payment assistance in the form of forgivable loans.

> Interest subsidies: This is usually an up-front discounted payment to a private lender in exchange for a lower interest rate on a loan. An interest subsidy may also be a deposit in an interest-bearing account from which monthly subsidies are drawn and paid to a lender along with the homeowner's monthly payment.

> Equity investments: An equity investment is an investment made in return for a share of ownership. Under this form of subsidy, the PJ acquires a financial stake in the assisted property and is paid a monetary return on the investment if money is left after expenses and loans are paid.

> Loan guarantees and loan guarantee accounts: HOME funds may be pledged to guarantee loans or to capitalize a loan guarantee account. A loan guarantee or loan guarantee account ensures payment of a loan in case of default.

^ A loan guarantee is a written promise to pay the lender some percentage of the outstanding principal balance of a loan in the event the borrower defaults. It may be held for a specified period of time or reduced by a specific amount over time as the loan principal is repaid.

^ A loan guarantee account is a loan loss reserve held by the lender in an amount equal to some percentage of the outstanding principal.

Program Income and Guaranteed Loans

Repaid loans guaranteed with HOME monies are not considered program income and are not subject to HOME requirements.

^ The lender holding the loan guarantee account may require a minimum balance, as well as a percentage of the principal amount of the loan. The percentage of the loan amount held as guarantee may vary from loan to loan, or from program to program.

^ HOME rules require that the amount of money in a loan guarantee account must be based on a reasonable estimate of the default rate on the guaranteed loans, and may not exceed 20 percent of the total outstanding principal guaranteed, except that the account may include a reasonable minimum balance.

> Other forms approved by HUD: Other forms of assistance require HUD approval. If the PJ intends to use a form of assistance not listed above, the PJ's Consolidated Plan or Action Plan should describe the proposed form of assistance. Once approved by HUD as part of the Plan, no other HUD approval is required.

Project Subsidy Limits

* Minimum HOME investment: The minimum amount of HOME funds is an average of $1,000, multiplied by the number of HOME-assisted units in the project.

> The minimum only relates to the HOME funds, and not to any other funds that might be used for project costs.

> The minimum HOME investment does not apply to TBRA.

* Maximum HOME investment: The maximum per-unit HOME subsidy limit varies by PJ. HUD determines the maximum amounts, which are based on 95% of area median purchase price.

* The maximum per-unit subsidy limit is:

> Based upon 95% of the median purchase price of existing housing and/or newly constructed housing in the area using data from the FHA single family mortgage program data and other appropriate data that are available nationwide for sales of existing and/or new constructed housing.

Computing a Project's Per-Unit Subsidy

When computing the HOME subsidy per unit, it is not necessary to include HOME-funded TBRA associated with the project.

* Actual HOME Investment: The actual subsidy provided will depend on the following factors.

> The proportion of the total project cost that is HOME-eligible -- some planned project costs may not be eligible expenses under the HOME Program.

> The number of units in the project is HOME-assisted -- projects may have a mix of HOME- and non-HOME-assisted units.

> The financial needs of the project -- HOME projects may not receive more subsidy than is required to make them financially feasible.

* To determine what is required and reasonable, ADFA will complete a cost allocation and subsidy layering analysis. HOME project awards are based on the completed cost allocation and subsidy layering analysis.

> Part III of this chapter provides an overview of the cost allocation and subsidy layering reviews.

> Cost allocation and subsidy layering are impacted by any changes in the number of HOME-assisted units, total number of units in the project, development cost and/or financing sources.

> Because of these requirements, all HOME Recipients are obligated to contact ADFA as soon as there are any changes in project size/scope, cost or financing sources.

ELIGIBLE COSTS

Eligible costs depend on the nature of the program activity. The individual program chapters (Chapters 4 through 7) provide specific lists of eligible costs. A general list follows.

* New construction: HOME funds may be used for new construction of both rental and ownership housing. Any project that includes the addition of dwelling units outside the existing walls of a structure is considered new construction.

* Rehabilitation: This includes the alteration, improvement or modification of an existing structure. It also includes moving an existing structure to a foundation constructed with HOME funds. Rehabilitation may include adding rooms outside the existing walls of a structure, but adding a housing unit is considered new construction.

* Reconstruction: This refers to rebuilding a structure on the same lot where housing is standing at the time of project commitment. HOME funds may be used to build a new foundation or repair an existing foundation. Reconstruction also includes replacing a substandard manufactured housing unit with a new manufactured housing unit. During reconstruction, the number of rooms per unit may change, but the number of units may not. NOTE: Replacing a manufactured housing unit with a stick-built unit is considered a homebuyer development activity even if the applicant/beneficiary owns the lot and existing manufactured unit.

* Conversion: Conversion of an existing structure from another use to affordable residential housing is usually classified as rehabilitation. If conversion involves additional units beyond the walls (envelope) of an existing structure, the entire project will be deemed new construction. Conversion of a structure to commercial use is prohibited.

* Site improvements: Site improvements must be in keeping with improvements to surrounding standard projects. They include new, on-site improvements (sidewalks, utility connections, sewer and water lines, etc.) where none are present. They are essential to development or repair of existing improvements. Building new, off-site utility connections to an adjacent street is also eligible. Off-site infrastructure is not eligible as a HOME expense, but may be eligible for match credit.

Reconstruction & Environmental Review

Reconstruction may take place anywhere on the lot; however, reconstruction of a single family unit in a new location on the lot is classified as new construction for purposes of environmental review. Reconstruction of multi-family is viewed as new construction for the purposes of environmental review if the number of units is increased or decreased by more than 20% and/or the cost of reconstruction is more than 75% of the total estimated cost of the replacement after the work is completed. Refer to 24 CFR Part 58 for more information.

Example: Infrastructure, such as sewer and water lines in a public street in front of a HOME-assisted property, cannot be paid for with HOME funds. However, the connections that run from the HOME-assisted property to the street are eligible HOME costs since they are essential to the property.

. Acquisition of property: Acquisition of existing standard property, or substandard property in need of rehabilitation, is eligible as part of either a homebuyer program or a rental housing project. After acquisition, rental units must meet HOME rental occupancy, affordability and lease requirements.

. Acquisition of vacant land: HOME funds may be used for acquisition of vacant land only if construction will begin on a HOME project within 12 months of purchase. Land banking is prohibited.

Note: ADFA HOME funds requested for acquisition and eligible soft costs may be disbursed ONLY after the start of construction (policy excludes CHDO Set-aside projects.)

. Demolition: Demolition of an existing structure may be funded through HOME only if construction will begin on the HOME project within 12 months.

. Relocation costs: The Uniform Relocation Act and Section 104(d) (also known as the Barney Frank Amendments; see the appendix for detailed information on these requirements) apply to all HOME-assisted properties. Both permanent and temporary relocation assistance are eligible costs. Staff and overhead costs associated with relocation assistance are also eligible.

. Refinancing: HOME funds may be used to refinance existing debt on single-family, owner-occupied properties in connection with HOME-funded rehabilitation. The refinancing must be necessary to reduce the owner's overall housing costs and make the housing more affordable and if the rehabilitation cost is greater than the amount of debt that is refinanced. Refinancing for the purpose of taking out equity is not permitted. HOME may also be used to refinance existing debt on multi-family projects being rehabilitated with HOME funds, if refinancing is necessary to permit or continue long-term affordability, and is consistent with PJ-established refinancing guidelines.

. Capitalization of project reserves: HOME funds may be used to fund an initial operating deficit reserve for new construction and rehabilitation projects for the initial rent-up period. The reserve may be used to pay for project operating expenses, scheduled payments to a replacement reserve and debt service for a period of up to 18 months.

. Project-related soft costs: These must be reasonable and necessary. Examples of eligible project soft costs include:

> Finance-related costs;

> Architectural, engineering and related professional services;

> Tenant and homebuyer counseling, provided the household receiving the counseling ultimately becomes the tenant or owner of a HOME-assisted unit;

> Affirmative marketing and fair housing services to prospective tenants or owners of an assisted project; and

> Staff costs directly related to projects (not including TBRA.)

See Chapter 2 Administrative and Management Overview for more information on project related soft costs.

PROHIBITED ACTIVITIES

The HOME Program regulations explicitly prohibit certain activities which are outlined below.

. Project reserve accounts: HOME funds may not be used to provide project reserve accounts (except for initial operating deficit reserves) or to pay for operating subsidies.

. Tenant-based rental assistance for certain purposes: HOME funds may not be used as rental assistance in conjunction with the federal Rental Rehabilitation Program (Section 17) to prevent displacements. They also may not be used for certain mandated existing Section 8 Program uses, such as Section 8 rent subsidies for troubled HUD-insured projects.

. Match for other programs: HOME Program funds may not be used as the "nonfederal" match for other federal programs except to match McKinney Act funds (see Chapter 14 Match).

. Development, operations or modernization of public housing: HOME Program monies may not be used to provide assistance authorized under section 9 of the 1937 Act (Public Housing Capital and Operating Funds).

. Properties receiving assistance under 24 CFR Part 248 (Prepayment of Low-Income Housing Mortgages): Properties receiving assistance through the Low Income Housing Preservation and Resident Homeownership Act (LIHPRHA) or the Emergency Low Income Preservation Act (ELIHPA) are not eligible for HOME assistance except if the HOME assistance is provided to priority purchasers. These programs are no longer funded.

. Additional investment of HOME funds (double-dipping): During the first year after project completion, the PJ may commit additional funds to a project. After the first year, no additional HOME funds may be provided to a HOME-assisted project during the relevant period of affordability, except that:

> Rental assistance to families may be renewed.

> Rental assistance may be provided to families that will occupy housing previously assisted with HOME funds.

> A homebuyer may be assisted with HOME funds to acquire a unit that was previously assisted with HOME funds.

. Acquisition of PJ-owned property: A PJ may not use HOME Program funds to reimburse itself for property in its inventory or property purchased for another purpose. However, in anticipation of a HOME project, a PJ may use HOME funds to:

> Acquire property.

> Reimburse itself for property acquired specifically for a HOME project with other funds.

. Project-based rental assistance: HOME funds may not be used for rental assistance if receipt of the funds is tied to occupancy in a particular project. Funds from another source, such as Section 8, may be used for this type of project-based assistance in a HOME-assisted unit. Further, HOME funds may be used for other eligible costs, such as rehabilitation, in units receiving project-based assistance from another source -- for example, Section 8 or state-funded project-based assistance.

. Pay for delinquent taxes, fees or charges. HOME funds may not be used to pay delinquent taxes, fees or charges on properties to be assisted with HOME funds.

. Prohibited Fees. State recipients, subrecipients, community housing development organizations (CHDO), housing non-profits, and for-profit developers may not charge servicing, origination, or other fees for the purpose of covering costs of administering the HOME program.

THE PROPERTY

The HOME Program has rules about the type and value of properties eligible for assistance.

Property Types

. Depending on the nature of the program activity, HOME rules specify the types of property that are eligible for funding. See the individual program activity chapters for guidance.

. Public facilities are not eligible under HOME even if constructed to serve a HOME-assisted project. See CPD Notice 01-5 in the Appendix.

Property Value

. For owner-occupied and homebuyer properties, HOME limits the value or purchase price of the property. In short, the price or, in the case of rehabilitated properties, the value may not exceed 95 percent of the area median purchase price.

Property Standards

. HOME-funded properties must meet certain minimum property standards.

New Construction

> State and local codes, ordinances, and zoning requirements - Housing must meet all applicable State and local codes, ordinances, and zoning requirements or in absence of State or local building code, the International Residential Code or International Building Code (as applicable to the type of housing) of the International Code Council.

> All new construction work must also conform to the International Energy Conservation Code (IECC) and applicable state or local energy conservation codes.

> Additionally, ADFA requires that all new building construction complies with the Arkansas Energy Code. ADFA HOME program Recipients must document compliance using the Certificate of Compliance for the current Arkansas Energy Code.

> Site and neighborhood standards: The site and neighborhood standards of 24 CFR 983.57(e)(2) and (3) applies only to the new construction of rental housing.

> Universal Design standards: ADFA requires units to adhere to the Arkansas Usability Standards in Housing: Guidance Manual for Constructing Inclusive Functional Dwelling (AUSH).

> Housing must meet the accessibility requirements of 24 CFR part 8, which implements Section 504 of the Rehabilitation Act of 1973, Americans with Disabilities Act implemented at 28 CFR parts 35 and 36, as applicable, and covered multifamily dwellings must meet the design and construction requirements at 24 CFR 100.205, which implements the Fair Housing Act. .

> Disaster Mitigation: Housing must be constructed to mitigate the impact of potential disasters in accordance with State and local codes, ordinances or other requirements as HUD may establish (where applicable).

> Written cost estimates, construction contracts and construction documents.

ADFA will ensure the construction contract(s) and construction documents describe the work to be undertaken in adequate detail so that inspections can be conducted. ADFA will review and approve written cost estimates for construction and determine that costs are reasonable.

> Construction progress inspections. ADFA will conduct progress and final inspections of construction to ensure that work is done in accordance with the applicable codes, the construction contract, and construction documents.

Rehabilitation

> State and local codes, ordinances, and zoning requirements - Housing must meet all applicable State and local codes, ordinances, and zoning requirements or in absence of State or local building code, the International Existing Building Code of the International Code Council.

> All rehabilitation work must also conform to the International Energy Conservation Code (IECC) and applicable state or local energy conservation codes.

> Additionally, ADFA requires that all rehabilitation work complies with the Arkansas Energy Code. ADFA HOME program Recipients must document compliance using the Certificate of Compliance for the current Arkansas Energy Code.

> Health and Safety - Housing must address life-threatening deficiencies immediately, if housing is occupied.

> Uniform Physical Condition Standards -- The properties must be free of deficiencies established in 24 CFR 5.703 (Uniform Physical Condition Standards).

> Major Systems: Major systems are: structural support; roofing; cladding and weatherproofing (e.g., windows, doors, siding, gutters); plumbing; electrical; heating, ventilation, and air condition.

^ Major systems for rental housing - Upon project completion of each major system, ADFA must estimate (based on age and condition) the remaining useful life of the major systems. For multifamily projects of 26 units or more, ADFA will determine the useful life of the major systems through a capital needs assessment.

^ Major systems for homeownership housing - Upon project completion, each major system must have a remaining useful life of at least five years or the major system must be rehabilitated or replaced as part of the rehabilitation work.

> Capital Needs Assessment - Housing must address all work identified in the capital needs assessment.

^ A capital needs assessment will be completed for multifamily rental housing projects of 26 units or more to determine all work to be performed and identify and address the long-term physical needs of the project.

> Lead-based paint - Housing must meet the lead-based paint requirements at 24 CFR part 35.

> Disaster Mitigation -- Housing must be improved to mitigate the impact of potential disasters in accordance with State and local codes, ordinances or other requirements as HUD may establish (where applicable).

> Housing must meet the accessibility requirements of 24 CFR part 8, which implements Section 504 of the Rehabilitation Act of 1973, Americans with Disabilities Act implemented at 28 CFR parts 35 and 36, as applicable, and covered multifamily dwellings must meet the design and construction requirements at 24 CFR 100.205, which implements the Fair Housing Act.

> Construction documents and cost estimates. The work to be completed must meet ADFA's rehabilitation standards. The construction documents (i.e., written scope of work to be performed) must be in sufficient detail to establish the basis for a uniform inspection of the housing to determine compliance with ADFA's standards. ADFA will review and approve a written cost estimate for rehabilitation after determining that costs are reasonable.

> Frequency of inspections. ADFA will conduct an initial property inspection to identify the deficiencies that must be addressed. ADFA will also conduct progress and final inspections to determine that work was done in accordance with work write-ups.

Acquisition of Standard Housing

> Existing housing that is acquired for rental housing, and that was newly constructed or rehabilitated less than 12 months before the date of commitment of HOME funds, must meet the above property standards for new construction or rehabilitation projects, as applicable. ADFA will document this compliance based upon a review of approved building plans and Certificates of Occupancy, and an inspection that is conducted no earlier than 90 days before the commitment of HOME assistance.

^ All other existing housing that is acquired with HOME assistance for rental housing must meet the rehabilitation property standards requirements. ADFA will document this compliance based upon an inspection that is conducted no earlier than 90 days before the commitment of HOME assistance.

^ Existing housing that is acquired for homeownership (e.g, downpayment assistance) must be decent, safe, sanitary, and in good repair. At a minimum the housing must meet the following:

. Applicable State and local housing quality standards and code requirements

. Housing must be free of deficiencies established in 24 CFR 5.703 (Uniform Physical Condition Standards).

Manufactured Housing

> Construction of all manufactured housing including manufactured housing that replaces an existing substandard unit under the definition of "reconstruction" must meet the Manufactured Home Construction and Safety Standards at 24 CFR 3280. The following requirements must also be met:

^ Installed according to State and local laws or codes. In the absence of state or local laws or codes the unit must be installed according to the manufacturer's written instructions.

^ At time of project completion, must be on a permanent foundation that meets the requirements for foundation systems as set forth in 24 CFR 203.43f(c)(i).

^ At time of project completion, be connected to permanent utility hook-ups.

^ At time of project completion, be located on land owned by the manufactured housing unit owner or has a lease equal to the applicable period of affordability.

> Existing manufactured housing, the foundation and anchoring must meet all applicable State and local codes, ordinances, and requirements or in the absence of local or state codes, the Model Manufactured Home Installation Standards at 24 CFR 3285. Manufactured housing that is rehabilitated using HOME funds must meet the above property standards requirements, as applicable. ADFA will document this compliance in accordance with inspection procedures that ADFA has established pursuant to § 92.251, as applicable.

Tenant-Based Rental Assistance

> All housing occupied by tenants receiving HOME tenant-based rental assistance must meet the Housing Quality Standards at 24 CFR 982.401, or the successor requirements as established by HUD.

Exhibit 3-1 explains the minimum property standards that apply to each type of HOME activity.

EXHIBIT 3-1

MINIMUM PROPERTY STANDARDS BY ACTIVITY TYPE

THE APPLICANT/BENEFICIARY

The HOME Program is designed to provide affordable housing to low-income and very-low-income families and individuals. Therefore, the program has rules about targeting program resources and establishing applicant eligibility.

Program Targeting

* ADFA must use 100 percent of its HOME funds to assist families with incomes below 80 percent of the area median income.

* For rental housing or TBRA: When HOME funds are used for rental housing or for TBRA, additional targeting requirements apply:

> For each annual HOME allocation, ADFA requires that 100 percent of the occupants of HOME-assisted rental units and households assisted with HOME-funded TBRA must have incomes that are 60 percent or less of the area median. Note: This requirement is more stringent than the HOME program regulations that required at least 90 percent of HOME-assisted rental and TBRA households be at or below 60 percent of area median income.

> 20 percent of the units in each rental housing project containing five or more units must be occupied by tenant families with incomes at or below 50 percent of median income.

Applicant Income Eligibility

Income Definition

When calculating the annual income of program beneficiaries, ADFA HOME Program Recipients must use the Section 8/Part 5 definition.

* Income eligibility: Beneficiaries of HOME funds -- homebuyers, homeowners or tenants -- must be low-income or very-low-income. Their income eligibility is determined based on their annual income.

* Annual income: Annual income is the gross amount of income anticipated by all adult household members during the 12 months following the effective date of the determination. NOTE: Annual income is sometimes referred to as gross income or annual (gross) income.

* Calculating annual income: To calculate annual (gross) income, the PJ may choose among two definitions of income listed below; however, ADFA has selected the Section 8/Part 5 definition. ADFA HOME Recipients must use the Section 8/Part 5 definition when calculating the annual income of their program beneficiaries.

> Section 8 (Part 5) annual (gross) income: The HOME program has always used the Section 8/Part 5 definition of annual income. It is still an acceptable definition to use for funded activities.

> IRS adjusted gross income: The final rule allows HOME participants to determine annual income by using the calculation for "adjusted gross income" outlined in the federal income tax IRS Form 1040. (Note: while the IRS calls this calculation "adjusted gross income," it is considered "annual income" for the purposes of the HOME program. "Adjusted income" under the HOME program -- used only when calculating rents or TBRA -- requires taking annual income and adjusting it in accordance with Section 8 rules.)

Note: The definitions listed above provide guidance on what items to include in annual income calculation (for example, wages, salaries, tips, etc.). They do not affect the method in which income is verified (discussed under "Income Verifications" below) or how income is adjusted when calculating rents or TBRA.

Income Verifications

* Initial Verification: To determine if program applicants are income-eligible, Recipients must verify their income using at least 2 months source documentation evidencing annual income such as wage statements, interest statements, and unemployment compensation statements for the family.

Note: Annual income should include all adult household members, include nonrelated individuals living in the household.

> Income eligibility is based on anticipated income. When collecting income verification documentation, also consider any likely changes in income. For example, last year's tax return does not establish anticipated income; nor is it adequate source documentation.

> Once initial income verification is completed, a Recipient is not required to re-examine the applicant's income unless six months has elapsed before assistance is provided.

* Annual Re-examinations: For rental and TBRA programs, annual recertifications of income are required. While the HOME Program regulations require that income must be verified with source documentation every six years, ADFA requires income be verified with source documentation annually.

LONG-TERM AFFORDABILITY

To ensure that HOME investments yield affordable housing over the long term, HOME imposes rent and occupancy requirements over the length of an affordability period.

Affordability Periods

* For homebuyer and rental projects, the length of the affordability period depends on the amount of the HOME investment in the property and the nature of the activity funded. The table below provides the affordability periods.

* The HOME Final Rule eliminated the requirement that when HOME funds are used in conjunction with Federal Housing Administration (FHA) insurance, the affordability period be the term of the FHA-insured mortgage.

Occupancy

* Throughout the affordability period, the HOME-assisted housing must be occupied by income-eligible households.

> Rental housing: When units become vacant during the affordability period, subsequent tenants must be income-eligible and must be charged the applicable HOME rent. (See Chapter 6 Rental Housing Program for more information.)

> Homebuyer assistance: If a home purchased with HOME assistance is sold during the affordability period, resale or recapture provisions apply to ensure the continued provision of affordable homeownership. (See Chapter 5: Homeowner Housing Program - Homebuyers for more information.)

APPLICABILITY OF OTHER FEDERAL REQUIREMENTS

* HOME is subject to a number of cross-cutting Federal regulations, which are detailed in Chapter 13 and highlighted as applicable in the chapters covering homeowner rehabilitation, homebuyer and rental housing activities.

LAYERING

As described in Part II of this chapter under "Project Subsidy Limits", ADFA performs a cost allocation and subsidy layering review of HOME projects to determine the appropriate subsidy amount to the project.

* As explained in Part II, the actual HOME Investment in a project depends on the following factors.

> The proportion of the total project cost that is HOME-eligible -- some planned project costs may not be eligible expenses under the HOME Program.

> How many of the units in the project are HOME-assisted -- Projects may have a mix of HOME- and non-HOME-assisted units.

> The financial needs of the project -- HOME projects may not receive more subsidy than is required to make them financially feasible.

Example: Three units in a six-unit structure will be rehabilitated with HOME funds. The maximum-per-unit HOME subsidy for the area determined by HUD is $80,000. Thus, the HOME subsidy for this project cannot exceed $240,000 (3 X $80,000). The developer has estimated rehabilitation costs of $75,000 per unit. However, the subsidy needed to make the project financially feasible based on an analysis of the cash flow and development costs is only $210,000, or $70,000 per unit.

* To determine what is required and reasonable. ADFA will complete a cost allocation and subsidy layering review.

> Cost allocation and subsidy layering are impacted by any changes in the proportion of HOME-assisted unit to total units in the project, development cost or financing sources.

> Because of these requirements, all HOME Recipients are obligated to contact ADFA as soon as there are any changes in project size/scope, cost or financing sources at any point during the development of the project.

COST ALLOCATION

* HOME rules create a floor (minimum) for the number of HOME-assisted units a project must have. This floor is based on the proportional share of total eligible costs to be paid with HOME funds.

Example: Soccer City is considering a request for HOME funds from Sable Park Housing for a 20-unit building. The HOME-eligible development costs total $400,000. The developer has requested $100,000 in HOME funds. Since the HOME funds represent one-fourth of the total eligible development costs, Soccer City must require the project to have at least five HOME-assisted units, the "floor" Soccer City may choose to require more than five units to be HOME-assisted.

Example: When Can-do CHDO approached Soccer City for development funds for a 30-unit rehabilitation project, Soccer City decided to subsidize half of their units. All of the units

were comparable in size, features, number of bedrooms and development cost. Consequently, Soccer City provided half of the $600,000 in HOME-eligible development costs (i.e., $300,000) to Can-do and 15 of the 30 units were designated HOME-assisted.

* As such, before determining the allowable HOME subsidy amount, ADFA establishes the total HOME-eligible cost for the project.

* Once the total HOME-eligible costs are established for the project, ADFA must allocate costs across units.

> If both the assisted and non-assisted units are comparable in size, features and number of bedrooms, the HOME-eligible costs can be pro-rated across units. (Since floating units, by definition, must be comparable, costs should always be pro-rated.)

Example: Soccer City wants to subsidize development of a 30 unit project with HOME funds. Twenty of the units have one bedroom and ten have two bedrooms. All of the units have identical amenities. The city plans to underwrite one-third of the units (seven one-bedrooms and three two-bedrooms) and the owner plans to use the floating unit approach. Since all of the one-bedroom units are comparable to one another the costs associated with the one-bedroom units (and common costs on a pro-rated basis) can be spread across all of the one-bedroom units. The same is true of the two-bedroom units, since they also are comparable to one another

> If the assisted and non-assisted units are not comparable, the actual costs must be determined and allocated unit-by-unit. The specific units identified to "receive" HOME funds must be fixed -- that is, designated as HOME-assisted.

* HUD Notice CPD 98-02 provides further guidance on allocating costs in projects with HOME and non-HOME units. A copy of the notice can be located online at http://www.hud.gov/utilities/intercept.cfm?/offices/cpd/lawsregs/notices/1998/98-2.pdf.

UNDERWRITING AND SUBSIDY LAYERING

* HUD establishes limits on the amount of HOME funds that may be invested in affordable housing on a per-unit basis for specific areas.

* The 2013 HOME Final Rule requires underwriting all HOME projects (rental and homebuyer) whether or not the projects are assisted with other governmental assistance.

* Before committing funds to a project, ADFA evaluates the project in accordance with guidelines that it has adopted for determining a reasonable level of profit or return on owner's or developer's investment in a project and must not invest any more HOME funds, alone or in combination with other governmental assistance, than are necessary to provide quality affordable housing that is financially viable for a reasonable period of time (at minimum, the period of affordability).

* ADFA conducts the subsidy layering review in accordance with the guidelines presented in HUD Notice CPD-98-01 (see the Appendix). These guidelines include review of the following project documents:

> Sources/uses of funds: Recipients are required to provide ADFA the sources/uses of funds statement for the project with supportive documentation. This statement should reflect the project development budget and should list:

^ All proposed sources (both private and public) of funds and the dollar amounts for each respective source; and

^ All proposed uses of funds (including acquisition costs, rehabilitation/or construction costs, financing costs and professional fees) associated with the project.

> Certification of governmental assistance: Recipients must provide a formal certification as to whether or not additional governmental assistance will be provided to the project, and if so, what kind of assistance.

> Project development budget: Recipients must provide ADFA the project development budget so that ADFA can determine whether the development costs are necessary and reasonable.

^ The budget should include all costs associated with the development of the project, regardless of the funding sources.

^ "Reasonableness" of costs will be based on all of the following factors:

Lead Based Paint* If the dwelling unit was built prior to 1978 and is receiving funds for rehabilitation work, the Recipient or developer must comply with the rehabilitation requirements of the Lead Safe Housing Rule (24 CFR Part 35, Subpart J or Subpart K if rehabilitation assistance is under $5,000). The purpose of the regulation is to identify and address lead-based paint hazards before children are exposed to lead. (New construction is not subject to the Lead Safe Housing Rule.)

* The requirements of the Lead Safe Housing Rule depend on the level of assistance provided to the unit. The summary below provides a brief overview of the regulations. For more information, see http://www.hud.gov/offices/lead/.

> For units with a level of assistance less than $5,000, paint testing must be conducted on all painted surfaces to be disturbed or replaced during the renovation, or it must be presumed that all these painted surfaces are coated with lead-based paint. Safe work practices must be employed during the rehabilitation work, and upon completion, a clearance examination of the worksite is required. Clearance of the worksite is required prior to the unit being reoccupied.

> For units with a level of assistance over $5,000 and up to $25,000, lead hazards must be identified by a risk assessment (or presumed to be present) and then addressed through interim controls or standard treatments. Proper work practices, trained staff,

and clearance are also required (Subpart J for acquisition and rehabilitation of homebuyer projects.)

> For units with a level of assistance over $25,000, lead hazards must be identified through a risk assessment (or presumed to be present) and addressed through abatement by a certified abatement contractor. Clearance is required.

> The level of assistance is defined as the lesser of the per unit Federal assistance or the per unit hard costs of rehabilitation. When calculating the per unit hard costs of rehabilitation, do not include the lead hazard reduction costs.

* For acquisition only projects, where the property was built before 1978, there must be a visual assessment for deteriorated paint and any deteriorated paint must be stabilized in a lead safe manner. Clearance is required if any work is done.

* All homebuyers of pre-1978 properties must receive a Lead Disclosure statement from the seller. This should be documented in the project file. All homebuyers should also receive the lead-based based pamphlet, Protect Your Family From Lead in Your Home.

Construction Management

This section summarizes the construction management responsibilities of Recipients. For additional information, please see Chapter 11: Construction Management.

* Scope of work. Recipients must determine the scope of rehabilitation/reconstruction projects upfront, prior to application for ADFA funds.

> ADFA's Inspection Checklist and Work Write Up Template should be used.

> These forms can be found on the ADFA website.

* Bid solicitation. Construction bids must be solicited and obtained by the applicant and provided to ADFA for review prior to funding approval.

> ADFA requires upfront documentation and submission of the following materials related to solicitation of bids:

^ Copies of advertisements for bids;

^ Proof of publication; and

^ Bid tabulation worksheets.

> As part of the bid process, Recipients must request the following: ^ Contractors Arkansas State License;

^ General Liability Insurance;

^ Builders Risk Insurance; and

^ Payment and Performance Bond or Irrevocable Letter of Credit (reconstruction only).

> Contractors that do not have a state contractor's license or cannot obtain a builder's risk insurance policy, and payment and performance bond for the full amount of the construction contract are not eligible to participate on ADFA HOME rehabilitation/reconstruction projects.

> Also, construction bids must be good for 60 days from the date received by ADFA.

* Pre-construction conference. A preconstruction conference is required between the Recipient, the construction contractor, and an ADFA representative.

> A Preconstruction Conference Record, which is available on the ADFA website, is a required ADFA form.

* At the time of the preconstruction conference, the following agreements must be in executed and in place:

> A written agreement (i.e., contract) between Recipient and contractor (if applicable.)

> Agreements are standardized by ADFA, so Recipients must use the sample agreements found on the ADFA website.

* Progress inspection. Inspections are required

> Prior to approval of draw requests, and

> At the following stages:

^ Stage 1: Foundation and site prep, including: excavation, metals, termite treatment, rough-in plumbing, earth work, water proofing (vapor barrier), footing and slab work.

^ Stage 2: Major systems, including: plumbing top-out, electrical rough-in, framing, roof, interior wall systems, exterior wall systems, ventilation, and insulation

^ Stage 3: Build out, including: flooring systems, painting, doors, cabinets, HVAC, electrical top-out, and appliances.

^ Stage 4: Final inspection, ADFA shall pay for the initial final inspection and one additional inspection (punch list or retainage). Should the general contractor request a final inspection, and if repairs agreed to by the contractor and inspector on behalf of ADFA, are incomplete, the general contractor shall be responsible for each additional inspection fee(s) until the project has been successful approved. ADFA staff shall reduce the final pay request and/or the retainage payment for the amount of the additional inspection fee(s) (to include inspector's mileage) incurred by the general contractor.

> Certifications for plumbing, electrical, HVAC, Release of Liens, and final inspection are required at the completion of the construction work. A copy of these certifications can be found on the ADFA website.

ELIGIBLE BENEFICIARIES

Homebuyers must meet general eligibility requirements and income eligibility requirements. ADFA HOME Recipients must ensure these requirements are met.

General Eligibility

* To be eligible for HOME funds, the homebuyer must:

> Be low-income; annual (gross) household income that does not exceed 80 percent of median for the area, adjusted for family size;

> Occupy the property as a principal residence through the period of affordability (see section below on this topic under affordability period); and

> Complete a Homeowner Loan Application (provided as a form on the ADFA website).

> Additionally, homebuyers served under ADFA's downpayment assistance only program, must be first-time homebuyers who

^ Have not owned a home in the last three years;

^ Are displaced homemaker; or

^ Are single parents.

> These homebuyers are also required to attend an ADFA approved homebuyer counseling course prior to HOME assistance.

> Finally, the Recipient should complete the IDIS "Homeowner Set Up and Completion Form," available on the ADFA website.

^ Note, that until project completion, only the "set up" portion of the form must be submitted to ADFA.

^ Upon project completion, the "completion" portion of the form must be filled out.

^ At project completion, if there is any information that has changed from the "set up" section of the form, the Recipient must provide the correct, updated information prior to submitting the complete project completion form.

Income Eligibility Requirements

* ADFA requires that income eligibility be determined using the Part 5 (Section 8) Program definition for annual income.

* Recipients are required to use income verification forms, including a verification of employment, for calculating and verifying the annual incomes of the family. Annual income shall include the income of all persons in the household.

* Note: Annual income should include all adult household members, including nonrelated individuals living in the household.

* Examine at least two (2) months of source documents, such as wage statements, interest statements, unemployment compensation statements, or other supporting income documentation, to determine annual (gross) income.

* Eligibility is based on anticipated income during the next 12 months.

* Timing of income verifications varies by type of activity:

> For existing housing under ADFA's downpayment assistance program or acquisition and rehabilitation income verifications must be completed before HOME assistance is provided.

> For new construction, income verification must be completed before the contract to purchase is signed.

> Note that in either instance, income need not be reexamined at the time HOME assistance is actually provided unless more than six months has elapsed since the initial verification by the Recipient.

AFFORDABILITY PERIOD

ADFA requires an affordability period for homebuyer projects. During this period, homebuyers must maintain the unit as their principal residence and abide by certain rules in the event the unit is sold, no longer the homebuyer's principal residence, or refinanced. Recipients or developers must ensure these requirements are described to prospective homeowners prior to application and then met post application.

* The affordability periods for homebuyer loans are summarized in the table below:

Principal Residence Requirement

* During the affordability period, the homebuyer must occupy the unit as its principal residence.

* Recipients or developers should have a method for annual principal residence verification. Some options include:

> Certified letter sent to the homebuyer;

> Verification of hazard insurance on the property; and/or

> Review of annual tax records.

* If the unit is no longer the principal residence of the homebuyer, the Recipient or developer has two options:

> Ensure the homebuyer reoccupies the unit; or

> Pay back the outstanding total amount of HOME assistance (minus any principal loan payments, if applicable). Note, this may be more than the amount of direct assistance provided to the homebuyer under the recapture mechanism found in the mortgage.

Refinancing during the Affordability Period

* With ADFA's prior approval, the homeowner may refinance their first mortgage (i.e., the non-HOME debt) during the period of affordability.

> ADFA permits refinancing only to allow the owner to obtain a lower interest rate and subsequent lower mortgage payment.

^ Subsequent mortgage must be fixed rate and fully amortized

^ Owner cannot receive cash proceeds from the transaction, and

^ Total indebtedness does not exceed the value of the property.

Selling a Unit during the Affordability Period - Recapture Requirements

* The HOME Program requires that if a property is sold, either voluntarily or involuntarily (e.g., foreclosure) during the affordability period, the HOME investment must be "repaid." The HOME Program refers to this repayment requirement as "recapture."

* What is recapture? Recapture is defined as an affordability mechanism where the Recipient or developer executes a written agreement with the homebuyer that only includes the amount of "direct HOME assistance" that enabled the homebuyer to buy the dwelling unit. This assistance must be "recaptured," in whole or in part, if the unit is sold before the end of the affordability period.

* This "direct HOME assistance" is defined as a "mortgage subsidy" and includes the following for ADFA programs:

> Downpayment and closing cost assistance;

> Gap financing (e.g., second mortgage); and/or

> Reduction in purchase price from market value to an affordable sales price, if HOME funds were provided to a developer.

* The period of affordability, shown above, is based on the direct HOME assistance to the homebuyer.

* ADFA provides a 0% forgivable loan that is forgiven commensurate with the period of affordability. For example, a 10 year period of affordability would be forgiven at 120th a month for each month occupied by the homebuyer. Under the ADFA required recapture mechanism, the unforgivable portion of the amount of direct HOME assistance is due when the property is sold (or title is transferred) during the period of affordability, subject to net proceeds, to protect the HOME investment throughout the period of affordability.

* Net proceeds are defined by the sales price minus superior loan repayment (other than HOME funds, if applicable) and any seller's closing costs.

* If net proceeds exceed the amount of HOME assistance, the homebuyer will receive the balance of these proceeds.

* If net proceeds are less than the amount of HOME assistance, the amount available will be repaid to ADFA and the loan will be considered satisfied.

ARKANSAS DREAM DOWNPAYMENT INITIATIVE (ADDI)

* The goals of the ADDI funds are as follows:

> Increase the overall homeownership rate

> Create greater opportunity for homeownership among lower income and minorities

> Revitalize and stabilize communities

* ADFA will make available ADDI funds for downpayment and closing cost assistance toward the purchase of single-family housing (i.e., 1-4 family residence, condominium unit, or combination of manufactured housing and lot) by low-income families (80% of area median income or less) who are first-time homebuyers.

* Under ADDI, a first-time homebuyer is an individual and his or her spouse who have not owned a home during the three-year period prior to purchase of a home. In addition, the unit must meet all applicable State and local building codes and HUD-prescribed physical inspections procedures (Uniform Physical Condition Standards) pursuant to 24 CFR 5.705 in the absence of local codes. The purchase price cannot exceed the 95% of area median purchase price of existing housing and/or new constructed housing in the area. ADFA will provide the ADDI funds in the form of a forgivable loan (soft second mortgage) in an amount necessary to close the transaction adhering to HOME Program subsidy layering/underwriting guidelines.

* The ADDI amount may not exceed six percent (6%) or $10,000, whichever is less based upon the subsidy layering/underwriting review, of the purchase price for downpayment and closing costs assistance to eligible homebuyers. The minimum amount of ADDI assistance is $1,000. The borrower may not receive any cash back on ADDI loans. ADFA will not provide HOME funds for rehabilitation costs associated with the ADDI loan. All repairs must be completed on the structure prior to the approval of ADDI funds. ADFA will inspect all construction work completed as part of the ADDI loan.

* The assistance will be forgiven in equal annual installments over the period of affordability (5 years). The homebuyer must maintain the house as their principal residence for the full affordability period (5 years). The homebuyer will be required to complete a homebuyer education course through an ADFA approved homebuyer counselor. If the property is sold during the affordability period, ADFA will recapture the amount of ADDI/HOME funds that have not been forgiven. The homebuyer will also be required to execute a Promissory Note, Second Mortgage for the amount of assistance and subsidy agreement provided in accordance with established HOME Program affordability periods.

LIST OF ADFA FORMS

ADFA has all required homebuyer housing program forms on their website, www.arkansas.gov/adfa. These forms include:

* Homeowner Rehabilitation, Reconstruction, and New Construction Application

* Homeowner Loan Application

* HOME Promissory Note

* HOME Program Subordinate Mortgage

* Preconstruction Conference Record

* Construction Performance Manual

* Work Write up Template for the HOME Program

* Home Inspection Checklist

* Certifications - plumbing, electrical, HVAC, Release of Liens, and final inspection

The HOME Program and ADFA rules and regulations define both eligible Recipients of the ADFA rental program as well as the eligible activities these Recipients may undertake.

* Eligible Recipients fall into two categories:

> Owner/developer/sponsors of the affordable housing project. These may be local governments, public housing authorities, Community Housing Development Organizations (CHDOs) and other nonprofits, and for-profit entities. In particular, the eligible Recipient will be the entity responsible for project development, but may also include all affiliated entities, such as an owner that is also the property manager.

> Recipients manage an affordable rental program on behalf of ADFA. State Recipients are defined as units of local government that carry out a HOME program activity on behalf of ADFA. Public agencies and/or nonprofit organizations that administer all or a portion of ADFA's HOME program are called Subrecipients.

* Note that eligible Recipients may not have more than three HOME projects underway at any given time period.

> If a Recipient has three active HOME projects/programs, the Recipient cannot submit applications for a new project/program until 100% of the HOME funds on any one of the three previously approved projects/programs have been expended.

> Recipients that are combining HOME funds with Low Income Housing Tax Credits (LIHTC) are excluded from this requirement.

* Entities that are interested in participating in ADFA's HOME Rental Program must submit applications.

> Applications will be accepted on a continuous basis as long as funds are available.

> Applicants may receive technical assistance by attending an ADFA sponsored information/training session prior to submitting an application. These sessions will address the HOME Program requirements and ADFA guidelines as well as application procedures.

Eligible Activities

* ADFA uses HOME funds to support a range of rental activities including:

> Acquisition of land or existing structures must include 5 or more HOME-assisted units;

> New construction. ADFA requires that all new construction projects include a minimum of 5 HOME assisted rental units;

> Rehabilitation of existing structures must include 5 or more HOME-assisted units; and

> Reconstruction of both multi-family and single family structures. In particular, reconstruction will be considered for any single family structure if rehabilitation is not economically feasible or the projected per unit rehabilitation costs is equal to or greater than $25,000.

Reduction of Units

* For multi-family rental projects, the number of units designated as HOME-assisted may only be reduced for troubled projects in accordance with §92.210.

* In projects with 100% HOME-assisted units, if ADFA determines there is a need for an on-site manager to contribute to the stability of the property, one home-assisted unit my be converted to an on-site manager's unit (non-assisted) unit.

Terminated Projects

* When HOME funds are expended for projects that are terminated before completion, voluntarily or involuntarily, the HOME funds that have been expended are ineligible and must be repaid. ADFA must terminate any projects that does not meet the HOME requirements for affordable housing (affordability provisions, income targeting, property standards etc,) and repay the HOME funds expended for the project.

> The termination of affordability restrictions does not relieve ADFA of its repayment obligations for housing that does not remain affordable for the required period.

FORMS OF ASSISTANCE

* ADFA provides two types of HOME assistance:

> Construction loans: A short-term or interim loan to cover the cost of constructing or rehabilitating a project, with one or more long-term, permanent loans taking out (paying off) the construction loan at project completion.

> Permanent loans: Proceeds used to repay the construction, bridge and predevelopment loans. If the permanent financing replaces other loans, original loans must be used for HOME-eligible costs. Note that HOME assistance is gap financing and as such will not finance all of the total development costs.

* ADFA has the following standard loan terms and conditions for repayment of Rental Housing Program, including:

> All loans must be evidenced by full executed promissory note payable at a one percent (1%) interest rate with a term of twenty (20) years and amortized over twenty (20) years or a one percent (1%) interest rate with a term and amortization that will match an extended affordability period.

> Applications must have a minimum debt coverage ratio of 1.15 including the debt service on the HOME loan.

> Monthly payments that are due and payable will be deferred for one (1) year from the placed in service date, as evidenced by a permanent certificate of occupancy for all of the units comprising the property. ADFA may defer loan payments for up to two (2) years depending upon the type of development, number of units and established need.

> Any amounts not paid, both principal and interest shall accrue and be payable on the Maturity Date of the loan.

* For projects utilizing HOME Program funds and U.S. Department of Agriculture (USDA) Rural Development (RD) funds and/or any form of HUD Financing, the HOME loan will match the terms and amortization of the USDA RD loan and HUD Financing.

ELIGIBLE COSTS

HOME Program funds may be used for certain administrative and development costs as dictated by 24 CFR 92.206 including hard costs, soft costs, relocation costs, bridge loans, project delivery costs, and initial operating deficit reserve. See Exhibit 6-1 for a detailed list of eligible costs.

* Hard costs. HOME funds can cover the actual hard cost of constructing or rehabilitating housing such as land, materials, demolition, site preparation, and other costs listed in Exhibit 6-1.

* Soft costs. HOME Program funds may be used to pay for project soft costs. Soft costs must be "usual customary, reasonable and necessary". Examples of soft costs include:

> Developer fee: ADFA HOME funds may be used to pay a pro rata share of the developer fee based upon percent of HOME funds to development costs. The following additional constraints apply to this line item:

^ ADFA restricts total developer fee to 15 percent.

^ For projects that do not utilize low income housing tax credits, fifty percent (50%) of the pro rata developer fee may be paid at 50% completion of the project. The remaining fifty-percent (50%) of the pro rata developer fee will be paid after the submission and approval of all project-related retainage documentation.

^ Additionally while soft costs include developer fees, developers cannot hire themselves as consultants on their HOME-Funded project and thus earn additional profit and/or fee.

> Initial Operating deficit reserve: The Final Rule clarified the use of HOME funds to cover the cost of funding an initial operating deficit reserve for new construction and rehabilitation projects.

^ This reserve is meant to meet any shortfall in project income during the project rent-up period.

^ The reserve cannot exceed 18 months.

^ The reserve can be used only for project operating expenses, scheduled payments to replacement reserves and debt service.

^ Reserves remaining at the end of 18 months may be retained for reserves at the PJ's discretion.

* Relocation costs. ADFA discourages involving displacement or relocation.

> Prior to application, applicants must contact ADFA if they are planning any development that may involve displacement or relocation.

> In the event relocation is unavoidable, applicants must adhere to the Uniform Relocation Act. HOME Funds may be used for the cost of permanent or temporary relocation of tenants.

* Bridge loans. ADFA HOME assistance can be used to pay the cost of interim construction loans used to finance the HOME assisted development under the following conditions:

> Costs incurred are HOME eligible costs

> ADFA receives prior notification and approves the use.

* Program and project administrative costs. These costs are eligible only for Recipients that administer a program. ADFA allows these Recipients to include a line item for program and project administrative costs in the development budget.

> Program and project administrative costs are limited to 10% of the final allocation amount for the proposed rental program/project.

> Recipients must submit an itemized budget for program and project administrative costs as a part of the initial application.

> Project-related soft costs are eligible only for costs directly associated with the HOME Program funded development and must be allocated on a prorated basis among HOME Program assisted units.

> Finally, a certification of costs must be submitted with all requests for program and project administrative costs.

ADFA's Cost Certification Form may be found at ADFA's website www.arkansas.gov/adfa.

> Program and project administrative costs are defined briefly below and in Exhibit 6-1. For a complete discussion and reference resources, see Chapter 2: Administrative and Management Overview.

^ Administrative costs include general management; oversight and coordination costs; staff and overhead costs; public information costs; cost of fair housing activities; indirect costs; and costs of complying with other Federal requirements.

^ Project-related soft costs are costs incurred by a Recipient or third party contractor on behalf of the Recipient and include:

. Staff and overhead costs related to the development of HOME assisted housing such as preparing work specifications, loan processing, inspections, and other services related to assisting potential owners, tenants, and homebuyers.

. Other project-related soft costs include cost of processing applications for HOME assistance; appraisals required by program regulations; project underwriting; construction inspections and oversight; project document preparation; costs associated with a project-specific environmental review; costs associated with informing tenants or homeowners about relocations rights or benefits; and costs to provide information services such as affirmative marketing and fair housing information to prospective tenants.

* Prohibited Fees. State recipients, subrecipients, community development housing organizations (CHDO), housing non-profits, and for-profit developers may not charge servicing, origination, or other fees for the purpose of covering costs of administering the HOME program.

EXHIBIT 6-1 HOME-ELIGIBLE RENTAL HOUSING COSTS

COST AND ASSISTANCE LIMITS

ADFA places cost and assistance limits on ADFA funded rental activities. These limits are discussed in detail below and are applicable to all HOME program Recipients and their activities.

* Costs on all ADFA rental activities are limited to:

> $151,000 per unit on general rental projects; and

> $162,000 per unit on Single family - new construction; and

> $131,000 per unit on acquisition/rehabilitation; and

> $179,000 per unit on assisted living projects; and

> $179,000 per unit for properties listed on the National Historic Register of Historic Places.

> "Per unit cost" is calculated by dividing the total development cost by the total number of units.

* However, ADFA does not intend to use HOME funds to cover the entire cost of the development; HOME is intended to provide gap financing. As such, ADFA limits HOME assistance by imposing the following limit:

> $90,000 per unit maximum.

* To ensure a diversity in participating Recipients and programs/projects, ADFA also limits the amount of HOME funds that can be requested to:

> $450,000 per application maximum.

* ADFA wants to ensure that Recipients are cost-effective and take advantage of scale-of-efficiencies. To that end, ADFA imposes the following minimum limits:

> $1,000 per unit minimum; and

> $100,000 minimum per application.

* Capital Needs Assessment: For multi-family rental housing projects of 26 or more total units, ADFA will require the work that will be performed in the rehabilitation of the housing and the long-term physical needs of the project through a capital needs assessment of the project.

* The 2013 HOME Final Rule requires underwriting all HOME projects (rental and homebuyer) whether or not the projects are assisted with other governmental assistance.

* Actual assistance to programs/projects will depend upon the amount of the subsidy determined by cost allocation and subsidy layering/underwriting analysis.

> Cost allocation and subsidy layering reviews will be completed by ADFA staff prior to award of ADFA HOME funds.

> The components of the cost allocation and subsidy layering/underwriting reviews are detailed in Chapter 3: General Requirements. Additionally information can be obtained from HUD Notices CPD 98-02 on allocating cost and CPD 98-01 on subsidy layering.

> Cost allocation and subsidy layering are impacted by any changes in the proportion of HOME-assisted unit to total units in the project, development cost or financing sources.

> As such, all ADFA Recipients are obligated to contact ADFA as soon as there are any changes in project size/scope, cost or financing sources at any point during the development of the project.

PROPERTY TYPES AND STANDARDS

ADFA uses HOME funds for specific types of properties that meet certain property standards. This section details the types of properties that are eligible and the property standards to which they must be built or rehabilitated. All ADFA HOME funded rental properties must meet Universal Design Standards.

Eligible Property Types

* HOME rental projects may be one or more buildings on a single site, or multiple sites that are under common ownership, management and financing.

> The project must be assisted with HOME funds as a single undertaking.

> The project includes all activities associated with the site(s) or building(s).

* HOME funds may be used to assist mixed-income projects (but, only HOME-eligible tenants may occupy HOME-assisted units). Common area costs must be prorated based upon the number of HOME-assisted units and non-HOME-assisted units.

* Transitional as well as permanent housing, including group homes and SROs, is allowed.

* Assisted Living projects are eligible, however HOME rent does not include food or the cost of supportive services. The owner may not make tenancy of the unit conditional on the tenant's participation in the assistant living and/or supportive services.

* There are no preferences for project or unit size or style.

Ineligible Property Types

* Properties previously financed with HOME during the affordability period cannot receive additional HOME assistance unless assistance is provided during the first year after project completion.

* HOME funds may not be used for development, operations or modernization of public housing financed under the 1937 Act (Public Housing Capital and Operating Funds).

Exception:

> HOME funds can, however, be used to develop a new unit that will serve as public housing, if that unit also receives HOPE VI funding and no Capital Funds (section 9) are used to develop the unit. Such a unit may receive Operating Fund assistance.

* HOME funds may be used in a project that also contains public housing units, provided that HOME funds are not used in the public housing units and the HOME units are separately designated.

* Projects assisted under 24 CFR Part 248 (Prepayment of Low-Income Housing Mortgages) may not receive HOME funds, unless assistance is provided to "priority purchasers" of such housing.

> A priority purchaser is a resident council organized to acquire a project in accordance with a resident homeownership program, or any nonprofit organization or State or local agency that agrees to maintain low-income affordability restrictions for the remaining useful life of the project. Organizations or agencies affiliated with a for-profit entity for the purposes of purchasing a property do not qualify as priority purchasers.

* Projects assisted under Title VI of NAHA (prepayment of mortgages insured by HUD).

* Emergency shelters with limited occupancy requirements.

* All types of student housing.

* Projects where developers/contractors do not have a valid Arkansas contractor's license.

* Projects that do not have a written verification in support of the proposed development from the chief elected official of the area where the project will be located.

Property Standards

* Meeting the appropriate codes. As with all HOME-assisted properties, rental properties must meet certain written standards. This section discusses these standards briefly. For a full discussion see Chapter 3: General Requirements.

> Acquisition: If no rehabilitation or construction is planned, the housing acquired must meet State and local housing quality standards and code requirements. If no such standards or codes exist, the property must meet Uniform Physical Condition Standards (UPCS).

> Construction and rehabilitation: Housing that is being constructed or rehabilitated with HOME funds must meet all applicable State and local codes, rehabilitation standards and ordinances. If no State and local codes apply, the property must meet one of the national standards as discussed in Chapter 3: General Requirements of the HOME Program. If new construction, the property must also meet the International Energy Conservation Code (See Exhibit 3-1 in Chapter 3 for a full listing of applicable codes).

* Owners must maintain properties in accordance with property standards throughout the affordability period. This will require periodic property inspections, as described in the section below on inspections.

Other Standards

* Accessibility. All assisted housing must meet the accessibility requirements of the Fair Housing Act and Section 504 of the Rehabilitation Act of 1973.

* Universal Design Standards. All HOME-assisted rental projects must include the following design criteria in accordance with Arkansas Usability Standards in Housing: Guidance Manual for Constructing Inclusive, Functional Dwellings (AUSH). (The AUSH is available on the internet at the following website address: www.studioaid.org. Under the "Design" link, click on "standards".).

> Seven percent of all residential units within the project must comply with the Level 5, "All-Inclusive" usability criteria as set forth in the AUSH.

> Each unit that is required to meet the Level 5, "All-Inclusive" usability criteria set forth in the AUSH must have at least one bathroom with an "accessible roll-in" shower facility with minimum dimensions of 60"x34" or 42"x42" if a corner shower facility.

> All ground level residential units in any building and all residential units with elevator access in any building in the project must comply with Level 1, "Visitable" usability criteria as set forth in the AUSH.

> All exterior and interior doors intended for passage must provide for a minimum clear opening of 34".

> All residential units in the project will have "closed-fist" operability throughout the unit, e.g., single handle door levers vs. door knobs; push stick lighting and environmental controls; cabinet doors can be opened with a closed fist; single handle faucets in bathrooms and kitchen.

> All environmental controls must provide visual and tactile cues. For lighting a "rocker" type switch is sufficient. For thermostats, a programmable and digital control with raised buttons is required.

> All primary entries, not in a breezeway, must have a minimum roof covering of 5'x5'.

> All primary entries must have an entry pad measuring at least 5'x5'.

> All sidewalks must be at least 5' wide.

* Multi-Family Housing Minimum Design Standards. Construction of the development must be in accordance with ADFA's "Multi-Family Housing Minimum Design Standards", as well as, all applicable local State and national building codes.

> The applicant's architect must complete and execute the "Multi-Family Housing Minimum Design Standards Checklist" found on ADFA's website www.arkansas.gov/adfa. A certification from the design architect or licensed engineer must be submitted with the application confirming that the proposed development will be constructed in:

^ Compliance with ADFA's "Multi-Family Housing Minimum Design Standards";

^ Compliance with all Federal and State accessibility laws; and

^ Compliance with all applicable local, State and national building codes.

> Applicability of minimum design standards to rehabilitation developments: If structural constraints prohibit adherence to ADFA's "Multi-Family Housing Minimum Design Standards", applicant may seek a waiver from ADFA for the standard concerned. Such waiver request must be in writing and include the following:

^ Certification by the design architect or licensed engineer that the standard concerned cannot be met due to structural constraints;

^ Certification by the design architect or licensed engineer that no alternative design can be undertaken to achieve the benefit of the required standard due to structural constraints; and

^ Statement by applicant that it will implement any alternative identified by the design architect or licensed engineer.

* Greater choice of housing opportunities. A Recipient's HOME program must comply with Title VI of the Civil Rights Act of 1964, the Fair Housing Act, Section 504, Executive Order 11063 and HUD regulations issued pursuant thereto so as to promote greater choice of housing opportunities.

* Site and Neighborhood Standards. The site and neighborhood standards of 24 CFR 983.6(b) apply only to new construction of rental housing. Records that document the results of the site and neighborhood standards review must be maintained by the Recipient.

LONG-TERM AFFORDABILITY

In return for providing HOME funds to a project, ADFA requires that the HOME-assisted units remain affordable to income eligible applicants for a specified period of time called the affordability period. This section discusses the following:

* Basis and length of the affordability periods;

* Units that are subject to the affordability period requirements;

* Rent and occupancy requirements;

* Lease requirements; and

* Monitoring and inspection schedules.

Affordability Period

* HOME-assisted rental units carry rent and occupancy restrictions for varying lengths of time, depending upon the average amount of HOME funds invested per unit:

* HOME affordability periods are minimum requirements. Recipients may establish longer terms of affordability for their programs.

* If a shorter affordability period is desirable, ADFA may work with the applicant to minimize the HOME per-unit subsidy.

> The HOME subsidy could be reduced and replaced with other funds that do not have long-term requirements, such as CDBG or State funds; or

> The developer may choose to designate a higher number of HOME-assisted units than required by the "floor" (minimum) in order to reduce the HOME investment per unit.

* Affordability restrictions remain in force regardless of transfer of ownership. At ADFA's discretion, they may be terminated only upon foreclosure or transfer in lieu of foreclosure.

> It is important to note that the termination of the affordability restrictions do not terminate the requirement that the units remain affordable (ADFA's responsibility to repay HOME funds invested in projects that are no longer affordable).

* However, affordability requirements will be revived if, before the foreclosure, the owner of record, or anyone with business or family ties to the owner, obtains an ownership interest in the property or project.

Designating HOME-Assisted Units

* Unlike other Federal programs, such as CDBG and Rental Rehabilitation, the HOME Program distinguishes between the units in a project that have been assisted with HOME funds and those that have not -- hence the term HOME-assisted unit. (This distinction between HOME-assisted and unassisted units allows HOME funds to be spent on mixed-income projects while still targeting HOME dollars only to income-eligible households.) This distinction is important for compliance during the affordability period.

> The number of HOME-assisted units in a given project must be specified at project commitment.

> Additionally, for properties with both assisted and non-assisted units, a PJ must determine whether the HOME assisted units will be "fixed" or "floating" units.

^ Fixed: When HOME-assisted units are "fixed," the specific units that are HOME-assisted (and, therefore, subject to HOME rent and occupancy requirements) are designated and never change.

^ Floating: When HOME-assisted units are "floating," the units that are designated as HOME-assisted may change over time as long as the total number of HOME-assisted units in the project remains constant.

. The floating designation gives the owner some flexibility in assigning units, and can help avoid stigmatizing the HOME-assisted units.

. If the floating designation is used, the owner must ensure that the HOME-assisted units remain comparable to the non-assisted units over the affordability period in terms of size, features and number of bedrooms.

> ADFA will designate the appropriate option at the time of project commitment

> Note that the HOME affordability rent and occupancy rules discussed below apply only to HOME-assisted units.

* Leasing mixed-income projects with both HOME-assisted and non-HOME assisted units.

> ADFA requires owners to maintain a mix of units throughout the affordability period that ensures that the project always has the correct number of HOME-assisted units. If a project has 10 of 15 units designated as HOME-assisted units when HOME funds are awarded, ADFA requires that the project have 10 HOME-assisted units with income eligible tenants throughout the affordability period.

> When leasing mixed-income projects, owners/managers must assure that:

^ A sufficient number of units are leased or held available for lease to HOME eligible tenants in order to meet the income targeting requirements of the program; and

^ Rents charged to tenants in the HOME units are within the rent limits published by HUD.

Rent and Occupancy Requirements

* During the affordability period, ADFA requires that rent and occupancy agreements for HOME-assisted units be enforced through:

> Covenants running with the property; or

> Deed restrictions.

* Covenants and deed restrictions may be suspended upon transfer by foreclosure or deed-in-lieu of foreclosure.

* Initial Occupancy. HOME-assisted units in a rental housing project must be occupied by households that are eligible as low-income families.

> If the housing units are not occupied by an eligible tenant within 6 months following the date of project completion, ADFA will require the owner to submit current marketing information and, if appropriate, submit a revised marketing plan to lease the housing units as quickly as possible.

> If the housing units are not occupied by an eligible tenant within 18 months following the date of project completion, ADFA will require the repayment all HOME funds invested in the unit.

* Rent limits. Every HOME-assisted unit is subject to rent limits designed to help make rents affordable to low-income households. These maximum rents are referred to as "HOME Rents."

> ADFA must review and approve the rents for each HOME-assisted rental project each year to ensure that they comply with the HOME limits and do not result in undue increases from the previous year.

> HUD will annually publish FMRs and calculations of rents affordable to families earning 65 percent (High HOME rent limits) and 50 percent of median (Low HOME rent limits). ADFA and Recipients establish new HOME rents for projects based on the HUD published High and Low HOME rent limits.

> The published rents are inclusive of utilities. The rents must be reduced for any tenant paid utility. Recipients must use the HUD Utility Schedule Model or by the otherwise determining the allowance based upon the specific utilities used for the project to calculate utility allowances to account for tenant paid utilities. See section below on Maximum Allowable HOME Rents and Utility Allowances.

> Based on changes in area income levels or market conditions, HOME rents, as calculated by HUD annually, may increase or decrease.

^ ADFA will use the HUD published rents to establish HOME rents and will inform HOME Recipients of the change in the HOME rents.

^ Tenants must be given at least 30 days written notice before increases are implemented. Any increases are also subject to other provisions of the lease agreements. For example, rents may not increase until the tenant's lease expires.

^ HOME rents may decrease. While project rent levels are not required to decrease below the HOME rent limits in effect at the time of project commitment, decreasing HOME rents may reflect a change in market conditions that may force owners to reduce rents in order to maintain tenants.

y HUD may permit adjustments to the rent structure if the financial feasibility of the project is threatened. This is important to lenders providing financing to HOME-assisted projects.

* Maximum allowable HOME rents and utility allowances.

> The HOME rents are the maximum rent an owner may charge a tenant (including the approved utility allowance) in a HOME assisted unit. That is, the HOME rents limits are inclusive of tenant paid utilities and the maximum allowable HOME rents must be reduced if the tenant pays for utilities.

> Recipients must use the HUD Utility Schedule Model or by the otherwise determining the allowance based upon the specific utilities used for the project to determine utility allowances to be used to determine rents for HOME-assisted rental projects.

> However, project owners may submit a proposed utility allowance to ADFA for review and approval.

^ Utility adjustments proposed by owners/developers for specific projects that differ from the HUD Utility Schedule Model's utility allowance must be supported by documentation.

> In rural areas the market rents may be well below the published HOME rents. ADFA encourages owners to charge tenants in HOME assisted units a rent that is appropriate for the market.

> Note that only tenant paid utilities are included in HOME rent limits. Assisted living projects may not add food or services to the HOME rent nor require the food services or supportive services as a condition of a tenant's occupancy.

INCOME ELIGIBILITY AND TARGETING REQUIREMENTS

ADFA seeks to provide safe decent and affordable housing to very low-income and low-income households throughout the State. To ensure that the properties serve their intended beneficiaries, program participants are required to lease HOME assisted units to income eligible households.

* ADFA provides HOME funds to develop units of affordable housing for very low-income and low-income households.

> ADFA's Low HOME rent units are restricted to individuals and families with incomes at or below 50% of the Area Median Income (AMI); and

> High HOME rent units are restricted to individuals and families with incomes at or below 60% of AMI.

* Income eligible households include certificate or voucher holders under the Section 8 and/or HOME tenant based rental assistance (TBRA) program.

> Owners may not refuse to lease HOME-assisted units to certificate of voucher holders under the Section 8 Program, or to a holder of a comparable document evidencing participation in a HOME tenant-based rental assistance (TBRA) program, because of the status of the prospective tenant as a holder of such certificate, voucher or comparable HOME TBRA document.

* The ADFA HOME rental housing has two constraints on occupancy:

> Program funds rule: The program funds rule applies to rental units.

^ ADFA requires that 100% of the total households assisted through the rental program have incomes at or below 60% of the area median income at initial occupancy.

> Project rules: The "project" rules specify the occupancy of units in each rental project.

^ In projects of five or more HOME-assisted units, at least 20 percent of the HOME-assisted rental units must be occupied by families who have annual incomes that are 50 percent or less of median income. These very-low-income tenants must occupy units at or below the Low HOME rent level.

. The balance of the HOME-assisted units must, to comply with the program rule, be occupied by persons or families whose adjusted income does not exceed 60% of AMI.

^ Projects with fewer than five HOME-assisted units do not have to restrict any units to the Low HOME rents or limit occupancy to tenants at 50 percent or below of the area median income.

. All the HOME-assisted units in projects with fewer that five units must, to comply with the HOME program rule, be occupied by persons or families whose adjusted income does not exceed 60% of AMI.

^ ADFA may designate (in its written agreement with project owner) more than the minimum HOME units in a rental housing project, regardless of project size, to Low HOME Rents.

* Where HOME Program funds are used in conjunction with LIHTC or USDA Rural Development funds, the more stringent income- eligibility requirements apply.

* Where HOME Program funds are used in conjunction with Federal or State project based rental assistance, 100% of the assisted units must be restricted to persons or families whose adjusted income does not exceed 50% of AMI.

* Affirmative marketing plan. For affordable rental housing with 5 or more HOME assisted units, ADFA requires Recipients to develop an Affirmative Marketing Plan and a set of procedures for implementing the plan. These plans are to be submitted to ADFA and should include:

> Methods to inform the public and potential tenants about fair housing laws and ADFA's policies;

> A description of the activities owners will do to affirmatively market housing assisted with ADFA HOME funds such as distribution of flyers; outreach to local churches etc.;

> A description of what owners will do to inform persons least likely to apply for the HOME assisted housing without special outreach; and

> Maintain records of the plan and the marketing activities to assess its effectiveness and a system for adjusting the plan if results are not achieved.

Determining and Verifying Income Eligibility of HOME Tenants

ADFA requires owners to verify and certify that tenants occupying the HOME assisted units meet income guidelines.

Income Definitions

* ADFA requires the use of the Part 5/Section 8 definition of income.

> For a detailed discussion of calculating annual income under Part 5/Section 8 rules, see the HOME Model Series "Technical Guide for Determining Income and Allowances for the HOME Program."

> For up-to-date rules and requirements, consult the regulations at 24 CFR Part 5 (subpart F).

Initial Income Verification

* Before the tenant occupies a unit, tenant income eligibility must be documented with at least 2 months of source documentation evidencing annual income, such as wage statements, interest statements and unemployment compensation statements for the family.

Note: Annual income should include all adult household members, including nonrelated individuals living in the household.

> Normally, the project owner is responsible for collecting this information and determining eligibility.

> ADFA or the Recipient is responsible for monitoring the project owner to ensure that initial income verifications are performed correctly.

> Property managers often have high staff turnover rates so it is important for the Recipient to review the income verification process and expectations with property management staff every 2 to 3 years.

Annual Recertification of Income

* Because the HOME Program imposes occupancy restrictions over the length of the affordability period, owners must establish systems to recertify tenant income on an annual basis.

> Typically, each tenant's income will be examined on the anniversary of the original income evaluation or at lease renewal.

> However, the owner may adopt an annual schedule and perform all verifications at the same time.

> When Recipients performs on-site inspections of the project, it should verify that tenant income recertification documentation is in the tenant files.

Addressing Increases in Tenant Income during the Affordability Period

* A tenant's income is likely to change over time. If these changes occur during the affordability period, the project owner must take certain steps to maintain compliance with HOME rent and occupancy requirements.

> The project must maintain the total number of HOME-assisted units, as required in the written agreement with ADFA or the Recipient.

> The project must maintain the correct proportion of High and Low HOME rent units.

> Rents must be adjusted for tenants whose incomes rise above the income limits for the designated HOME units (50 percent of AMI for Low HOME rent units and 80 percent of AMI for High HOME rent units).

The specific steps that a property owner/manager has to take depend on whether the development is a "fixed" or "floating" project. Procedures and flowcharts for both regimes are detailed below.

Fixed Unit Projects

* The owner should take the following steps to maintain the correct numbers of High and Low HOME rent fixed units.

> If the income of a tenant occupying a Low HOME rent unit increases above 50% of median, but does not exceed 80 percent of area median income, that unit remains a Low HOME rent unit until a HOME-assisted unit can be substituted.

^ The owner may not increase the tenant's rent above the Low HOME rent limit for as long as the unit retains the Low HOME unit designation and is occupied by the low-income household whose income increased above 50% of median but does not exceed 80% of median.

^ When a High HOME rent unit in the property vacates, that unit must be redesignated as a Low HOME rent unit. This unit must be rented to a very low-income tenant, at no more than the Low HOME rent.

^ Once the new Low HOME rent unit has been designated, the previous Low HOME rent unit that is occupied by the tenant at between 50 and 80% of median must be re-designated as a High HOME rent unit. At this time, the owner can increase the tenant's rent up to the High HOME rent, subject to the terms of the lease.

> If a tenant's income increases above 80 percent of the area median income, the unit this tenant occupies is still considered to be a HOME-assisted unit, but the tenant's rent must be adjusted as described below.

^ Over-income tenants with incomes over 80 percent of the area median in HOME-assisted "fixed" units must pay 30 percent of their adjusted income for rent and utilities. There is no rent cap for "fixed" units.

^ Where State or local law imposes rent controls, the rent control applies.

^ If the person whose income went over 80% of median was in a Low HOME unit and they elect to vacate the property, the new tenant must be at or below 50% of median income and rented at a Low HOME rent.

^ If the person whose income went over 80% of median was in a High HOME unit and they elect to vacate the property, the new tenant must be at or below 60% of median income and rented at a High HOME rent. (NOTE: ADFA rules require that all tenants' incomes be at or below 60% AMI at initial occupancy.)

See the fixed unit flow chart on the next page:

Click here to view image

Floating Unit Projects

* The owner must take the following into consideration to maintain the correct numbers of High and Low HOME rent floating units.

> Generally, the owner can draw on all the units in the property to designate High and Low HOME rent units. This means that the owner is not restricted to those units initially designated as HOME-assisted units when looking to redesignate a comparable unit as the new Low or High HOME unit.

> However, at no point is the owner required to designate more HOME-assisted units than was agreed upon in the written agreement with ADFA or the Recipient.

> When the income of a tenant occupying a Low HOME rent unit income increases over 50% of the median, but does not exceed 80 percent of the area median income, the unit that is occupied by the over-income tenant is considered a Low HOME rent unit until a comparable unit can be substituted.

^ The rent of the tenant whose income has gone above 50% of median must not exceed the Low HOME rent limit while the unit has a Low HOME rent unit designation.

^ To replace the Low HOME rent unit, the owner must rent the next available High HOME-assisted unit to a very-low-income tenant. The newly designated Low HOME rent unit must be rented to a tenant whose income does not exceed the very low-income limit (50% of median), at a rent that does not exceed the Low HOME rent limit.

^ Once a new Low HOME rent unit has been designated, subject to the terms of the lease, the rent of the initial tenant whose income has increased may be increased to the High HOME rent for the unit. This process should not increase the number of assisted units.

^ Note that the owner is not required to re-designate a vacated market rate unit as a HOME assisted unit unless one of the existing HOME-assisted units is occupied by an over-income household (over 80% of median). If one of the HOME-assisted units is occupied by an over-income person, that unit can become a market rate unit when the next vacant market rate unit is designated as a HOME-assisted unit. As noted above, the point is to maintain the total number of HOME assisted units in the project.

> If a tenant's income increases above 80 percent of the area median income, the unit this tenant occupies is still considered to be a HOME unit, but the tenant's rent must be adjusted as described below.

^ The next available market unit in the project of comparable size or larger must be rented to a HOME-eligible household. The unit occupied by the over-income tenant is no longer considered HOME-assisted, and the rent of that unit can be adjusted.

^ Over-income tenants in HOME-assisted "floating" units must pay 30 percent of their adjusted income for rent and utilities; however, the rent may not exceed the market rent for comparable, unassisted units in the neighborhood.

Note: In assisted units that are financed with both HOME and Low Income Housing Tax Credits (LIHTCs), the LIHTC rules apply when existing assisted tenant rents exceed 80% of median. Under the LIHTC program, the tenant's rent is not adjusted, and the unit does not need to be replaced by another comparable unit until the tenant's income rises above 140 percent of the LIHTC program eligibility threshold. This rule only applies to over income tenants in existing assisted units. ADFA, Recipients and owners may not defer to LIHTC rents in HOME units when initially developing assisted units.

See the floating unit flow chart on the next page:

Click here to view image

Leases

* The lease between the owner and the tenant in a HOME-assisted property must be for at least one year, unless by mutual agreement between the tenant and the owner.

* The lease between the owner and tenant in a HOME-assisted property cannot contain any of the following provisions:

> Agreement to be sued: Agreement by the tenant to be sued, to admit guilt, or to a judgment in favor of the owner in a lawsuit brought in connection with the lease.

> Mandatory Supportive Services: Agreement by the tenant (other than a tenant in transitional housing) to accept supportive services that are offered.

> Treatment of property: Agreement by the tenant that the owner may seize or sell personal property of household members without notice to the tenant and a court decision on the rights of the parties. This provision does not apply to disposition of personal property left by a tenant who has vacated a property.

> Excusing owner from responsibility: Agreement by the tenant not to hold the owner or the owner's agents legally responsible for any action or failure to act, whether intentional or negligent.

> Waiver of notice: Agreement of the tenant that the owner may institute a lawsuit without notice to the tenant.

> Waiver of legal proceedings: Agreement of the tenant that the owner may evict the tenant or household members without instituting a civil court proceeding in which the tenant has the opportunity to present a defense, or before a court decision on the rights of the parties.

> Waiver of a jury trial: Agreement by the tenant to waive any right to a trial by jury.

> Waiver of right to appeal court decision: Agreement by the tenant to waive the tenant's right to appeal or to otherwise challenge in court a court decision in connection with the lease.

> Tenant chargeable with cost of legal actions regardless of outcome: Agreement by the tenant to pay attorney's fees or other legal costs, even if the tenant wins in a court proceeding by the owner against the tenant. The tenant, however, may be obligated to pay costs if the tenant loses.

* Owners may terminate tenancy or refuse to renew a lease only upon 30 days' written notice, and only for: serious or repeated violation of the terms and conditions of the lease; violation of applicable Federal, State or local law; completion of the tenancy period for transitional housing or failure to follow any required transitional housing supportive services plan; or for other good cause.

* An owner of HOME-assisted rental housing must adopt written tenant selection policies and criteria that:

> Are consistent with the purpose of providing housing for very low-income and low-income families;

> Are reasonably related to program eligibility and the applicants' ability to perform the obligations of the lease;

> Provide for the selection of tenants from a written waiting list in the chronological order of their application, insofar as is practicable;

> Provide for the selection of tenants with special needs;

> Owners of HOME-assisted rental housing are permitted to limit eligibility or give a preference to a particular segment of the population only if ADFA permits in its written agreement

> Preferences may be given to disabled families who need services offered at a project, if certain conditions are met:

^ Must be limited to the population of families (including individuals) with disabilities whose disabilities significantly interfere with their ability to obtain and maintain housing;

^ Such families are not able to obtain and maintain themselves in housing without appropriate services; and

^ Such services cannot be provided in a nonsegregated setting.

* Limitations or preferences must not violate nondiscrimination requirements as listed in §92.350.

* Do not exclude an applicant with a certificate or voucher under the Section 8 Tenant-Based Assistance; Housing Choice Voucher Program (24 CFR part 982) or applicant participating in a HOME tenant-rental program.

* Give prompt written notification to any rejected applicant of the grounds for any rejection.

* Assisted living projects many not require a tenant to avail themselves of the food services or supportive services as a condition of the lease.

INSPECTIONS

ADFA must inspect each project at completion and during the period of affordability to determine that the project meets the property standards applicable under §92.251.

FREQUENCY

* An on-site inspection must be performed at the completion of the project.

* The first ongoing property inspection must occur within 12 months after project completion.

* An on-site inspection will be performed at least once every 3 years thereafter during the period of affordability.

> If there are observed deficiencies for any of the inspectable items in the property standards, a follow-up on-site inspection to verify that deficiencies are correct must occur within 12 months.

^ Life-threatening (health & safety) deficiencies must be correct immediately if the unit is occupied.

> ADFA will establish a list of non-hazardous deficiencies for which correction can be verified by third party documentation (e.g. paid invoice for work order) rather than re-inspection.

> ADFA will inspect more frequently for properties which have been found to have health and safety deficiencies.

^ Life-threatening (health & safety) deficiencies must be corrected immediately, if the unit is occupied.

> Annual Certification. The property owner must submit an annual certification to ADFA that each building and all HOME-assisted units in the project are suitable for occupancy.

SAMPLE SIZE

> For each inspection, ADFA must determine how many HOME-assisted units must be inspected in the project (for inspectable items - site, building exterior, building systems, and common areas);

^ For projects with 1 to 4 units, the inspectable items for each building with HOME-assisted units and 100% of the HOME units must be inspected.

^ For projects with more than 4 HOME-assisted units, the inspectable items for each building with HOME-assisted units will be based upon a statistically valid sample on a per project basis.

^ But not fewer than 4 units in each project and 1 HOME-assisted unit in each building.

RECORD KEEPING

* As for all program activities, HOME requires documentation for rental projects to show that all program regulations have been met. Because of the long-term monitoring required for rental projects, however, record-keeping responsibilities are slightly more substantial. This section briefly describes the record-keeping responsibilities associated with rental housing for ADFA, Recipients and the property owner. For a more detailed discussion of the recordkeeping responsibilities see Part I of Chapter 9: Record-keeping, Reporting and Monitoring.

* Recipient records. In addition to the general program and project documentation described in Part I of Chapter 9, Recipients have the following responsibilities:

> Records of its regular inspections of each rental project: These records should demonstrate that ADFA or the Recipient checked for and enforced compliance with the following HOME requirements:

^ Property standards: The records should show that a sufficient sample of HOME-assisted units were inspected, as well as exterior and common areas, and that any deficiencies identified were corrected.

^ Rent and occupancy requirements: Inspection records should also show that ADFA or the Recipient reviewed a sample of unit files to verify that HOME rent and occupancy requirements were met.

^ Lease requirements: In its review of unit files, ADFA or the Recipient should also ensure that leases meet HOME requirements.

^ Affirmative Marketing. In its review of project files, ADFA or the Recipient should ensure the owner has adopted written tenant selection policies and criteria.

^ Other items in the written agreement: If the written agreement between ADFA or the Recipient and the property owner contained any other provisions that require monitoring, ADFA or the Recipient's records should reflect that they were monitored.

> Other project oversight responsibilities: The Recipient should also conduct additional oversight of rental projects by analyzing the projects for financial stability, management capacity and other long-term viability issues.

^ This type of oversight will help to identify financial or management issues before they affect the project's ability to remain a viable component of ADFA or the Recipient's affordable housing stock.

^ During the period of affordability, ADFA will examine at least annually the financial condition of HOME-assisted rental projects with 10 HOME-assisted units or more to determine the continued financial viability of the housing and take actions to correct problems, to the extent feasible.

* Property owner records. Owner must keep adequate records and demonstrate compliance with HOME requirements. The owner should keep both project and tenant records.

> Project records should include documentation to back-up rent and utility allowance calculations. If the project's HOME-assisted units are "floating," the owner should also keep records to show how HOME occupancy targets were met (for example, rental logs to show that as units were vacated or tenants became over-income, HOME-assisted units were properly replaced).

> Tenant files should include the documentation necessary to demonstrate that each HOME-assisted unit is properly occupied by an income-eligible tenant. Such documentation includes: the tenant's application, initial income verification documents, subsequent income recertification documents and the tenant's lease.

* General rental housing records must be kept for five years after project completion.

* Tenant income, rent and inspection information must be kept for the most recent five years, until five years after the affordability period.

TROUBLED HOME-ASSISTED RENTAL HOUSING PROJECTS

* ADFA may invest additional HOME funds into HOME-assisted rental housing projects that are no longer financially viable during the period of affordability and are at-risk of foreclosure.

> A HOME-assisted rental projects is no longer financially viable when its operating costs significantly exceed its operating revenue.

* The use of HOME funds may include, but not limited to, rehabilitation of the HOME units and recapitalization of project reserves for the HOME units (to fund capital costs).

> The total HOME funding for the project (original investment plus additional investment) may not exceed the maximum per-unit subsidy limit established in §92.250(a).

> ADFA may require the period of affordability to be extended and/or an increase in the number of HOME assisted units, based on the amount of additional HOME funds.

> ADFA may permit the reduction in the number of HOME-assisted units, if the project contains more than the minimum number of units required to be designated as HOME-assisted units. The reduction will be determined based upon the period of affordability and the amount of the HOME assistance provided to the project.

* HUD Headquarters must approve any new investment of HOME funds and/or reduction of HOME-assisted units.

> HUD's approval will be based on the assessment of the market needs, available resources, and the likelihood of the project's return to financial viability.

> HUD's approval will be in the form of a written memorandum of agreement.

OTHER FEDERAL REQUIREMENTS

Exhibit 6-2 identifies the other Federal requirements that must be followed in implementing rental housing activities. This exhibit is meant to serve as a checklist only; for detailed information on each requirement, see the specifics in Chapter 13: Other Federal Requirements.

* Lead-Based Paint. Projects built before 1978 are subject to the requirements of the Lead Safe Housing Rule. See the summary provided in Chapter 13: Other Federal Requirements of this manual. Another resource is HUD's Office of Healthy Homes and Lead Hazard Control website, http://www.hud.gov/offices/lead.

* Section 3 Economic Opportunities. Section 3 of the Urban Development Act of 1968 requires applicants receiving $200,000 or more in HOME Program Funds, to the greatest extent feasible, provide opportunities for training and employment to low-income persons residing in the program service area. Also, to the greatest extent feasible, contracts for work (all types) to be performed in connection with HOME will be awarded to business concerns that are located in or owned by persons residing in the program service area.

> ADFA will meet with applicants to discuss the Section 3 Program requirements and require applicants to develop a Section 3 plan for employing and/or training persons residing in the Program Area.

> The plan will include:

^ Identification of Program Area; ^ Outreach and marketing avenues:

^ Potential employment opportunities;

^ Possible training opportunities;

^ An estimate of the number of persons reached; and

^ A projection of the number of persons receiving training and employment opportunities

> A number of resources are available online to assist in developing the Section 3 plan. The HUD website (www.hud.gov/offices/fheo/section3/section3.cfm) has the following reference materials:

^ The Section 3 Regulations: 24 CFR 135;

^ A sample Section 3 Plan; and

^ The Section 3 Summary Report (HUD Form 60002).

^ Additional guidance from HUD on compliance and recordkeeping for Section 3 is also available online at

http://www.hud.gov/offices/cpd/communitydevelopment/toolkit/files/MBE-WBEOutreach.pdf. Please refer to pages 2 and 3 of the Guidance.

> Recipients must submit Section 3 progress reports to ADFA on a quarterly basis. ^ The reporting form is available at ADFA's website at www.arkansas.gov/adfa

> ADFA will monitor Section 3 activity throughout the life of the project.

EXHIBIT 6-2 SUMMARY OF OTHER FEDERAL REQUIREMENTS

ADFA requires Recipients to identify and secure additional sources for HOME rental projects. The leveraging requirement for rental projects is described below. Additionally, ADFA encourages Recipients to combine HOME funds with Low Income Housing Tax Credits (LIHTC), one of the largest public resources available for affordable rental housing projects. This section discusses how to combine the two programs successfully.

LEVERAGING REQUIREMENTS FOR RENTAL PROJECTS

* ADFA requires applicants to leverage, secure additional sources of funds, for HOME funded rental development activities.

> For-profit property owners are required to provide a 1:1 leverage.

^ Example: $100,000 HOME Program funds must be leveraged by $100,000 for-profit owner funds;

> Nonprofit property owners are required to provide 1:0.5 leverage or contribution of funds;

^ Example: $100,000 in HOME Program funds must be leveraged by $50,000 nonprofit funds; and

> CHDOs are exempt from this requirement.

USING THE LOW INCOME HOUSING TAX CREDIT WITH HOME FUNDS

* There are essentially three ways HOME funds can be used with low-income housing tax credits.

> Market rate loan: The Housing and Economic Recovery Act (HERA) eliminated below-market Federal loans from the definition of federally subsidized properties, allowing 9 percent Credit on all federally subsidized properties, except tax-exempt bond financed properties, effective for buildings placed in service after date of enactment. In accordance with HERA, HOME loans below market in LIHTC projects located in QCT and DDAs are also eligible for the 30% basic boost.

> Below market rate loan with 4% credit: Some projects qualify only for a 4% credit regardless of the way HOME funds are invested in the project. For example, a project with other Federal or tax-exempt mortgage revenue bond funds included in the basis is only eligible for a 4% credit under any circumstance, so HOME funds can be lent at any below market interest rate terms without consequence to the credit.

* Projects using HOME funds with LIHIC have to consider a number of items in blending the two sets of program rules. Exhibit 6-3 provides an overview of tax credit rules and the requirements for combining the two programs.

* Occupancy requirements. Tax credit projects must set aside at least 20 percent of their units for tenants with incomes at or below 50 percent of the area median (20/40 set-aside) or 40 percent of their units for tenants with incomes at or below 60 percent of the area median income (40/60 set-aside). When combining HOME and tax credits, occupancy requirements depend on the type of credit taken and the type of HOME funding provided:

> Projects must ensure that they meet both sets of program rules.

> Of course, projects may choose to exceed these standards. Owners/ developers of tax credit projects will generally try to maximize their credits by creating higher set-asides for qualified occupants.

* Rents. When combining the two types of funding, two sets of rent rules apply.

> Qualified tax credit units must not exceed tax credit rent limits, while HOME-assisted units must meet HOME rent requirements. If a unit is being counted under both programs, the stricter rent limit applies.

^ Low HOME rent units are subject to the lower of the Low HOME rent and the tax credit rent (usually the Low HOME rent.)

^ High HOME rent units are subject to the lower of the High HOME rent and the tax credit rent (usually the tax credit rent.)

> When tenants receive additional subsidy through rental assistance programs such as Section 8, additional requirements apply.

^ Under tax credit rules, if the rental assistance program rent limit exceeds the tax credit rent, the unit rent may be raised to the higher limit as long as tenants pay no more than 30 percent of their adjusted monthly income for housing costs.

^ HOME allows the rent to be raised to the rental assistance program limit only if the tenant pays no more than 30 percent of adjusted income, the subsidy is project-based (not tenant-based), and the tenant's income is less than 50 percent of the area median income. All units that receive project based rental assistance must be occupied by households with incomes at or below 50% of the AMI.

^ In a joint tax credit/HOME-assisted unit, the stricter HOME requirements would apply.

* Establishing tenant eligibility. Both the HOME and tax credit programs require project owners to certify tenants' incomes, to ensure that they are income-eligible and that the project is in compliance with initial occupancy requirements.

> To demonstrate eligibility under both programs, property managers must have tenants certify their income, and obtain supporting documentation. This documentation must be kept in project unit files for review by the monitoring agencies.

> Under tax credit rules, only the Section 8 definition of annual (gross) income is used, whereas HOME allows a choice of three definitions. Projects using HOME funds and tax credits must use the Section 8 definition of income.

> Another difference between HOME and tax credit rules is that HOME requires verification of all asset income, whereas the tax credit rules require verification of asset income if the household's assets are greater than $5,000.

^ For total assets of less than $5,000, the tax credit program allows tenants to provide a signed statement of asset income.

^ A tenant in a unit subsidized by both sources of funds would have to comply with the stricter HOME requirements.

* Re-examinations of tenant eligibility. HOME allows for alternative methods of tenant recertification. For projects after October 2008, LIHTC projects may not have to reexamine tenant income.

* Over-income tenants. The HOME and tax credit programs have slightly different approaches to over-income tenants.

> The definition of an over-income tenant differs under the two programs. Tax credit rules define "over-income" as having income above 140 percent of the project income limit. Under HOME, the tenants are considered over-income if their income rises above 80 percent of area median income.

> Further, unlike under HOME, the rent remains restricted under the tax credit program. An owner may increase an over-income tenants rent, but only after the unit is replaced with another low-income unit in the project, thereby keeping the portion of low-income units above the minimum amount required for the owner to be eligible for the credit. To resolve this conflict, HOME rules state that when funds from both programs are used on the same unit, the tax credit rules should be followed.

* Monitoring. Both programs require monitoring at least once every three (3) years to ensure compliance with program rules over the length of a pre-established affordability period. Different agencies may monitor a project for compliance with the specific requirements of each program.

> Under the tax credit program, the affordability period is generally 30 years, unless the allocating agency establishes a longer one.

> Projects combining HOME funds and tax credits are subject to two sets of affordability periods. These periods may be set to be equal in length, or the project may be subject to one set of requirements for a shorter time period than the other.

> The tax credit program requires on-site inspections annually for no less than 20% of the tax credit units. HOME program units are subject to on-site inspections. Upon completion of the project, there will be an on-site inspection to confirm that contracted work is completed and the property meets the property standards. The first ongoing property inspection must occur within 12 months of project completion, and an inspection must be conducted at least once every three years thereafter.

Managing for Ongoing Compliance

* To maintain compliance with HOME rules, property owners will need to ensure that:

> The project is marketed to qualified applicants,

> Tenants are screened for eligibility,

> Rent and occupancy targets are observed, and

> Adequate property maintenance is conducted.

* Hiring a qualified property manager will help ensure all necessary actions are taken.

LIST OF ADFA FORMS

ADFA has all required rental housing program forms on their website, www.arkansas.gov/adfa. These forms include:

* 2009 Multi-Family Housing Application plus additions;

* Environmental Assessment Form;

* Environmental Statutory Checklist;

* "Multi-Family Housing Minimum Design Standards Checklist"

* ADFA"S Cost Certification Form

* HOME Rental Housing Income Limits

* HOME Rental Housing Rent Determination Chart 1 -- Low and High HOME Rents

* HOME Rental Housing Rent Determination Chart 2 -- Utility Allowance

* HOME Rental Housing Rent Determination Chart 3 -- Actual Maximum Rent Computation

* HOME Rental Project Compliance Report

* Section 3 Reporting Forms

* Affirmative Marketing, Tenant Selection and Lease Compliance Checklist

* Certifications - plumbing, electrical, HVAC, Release of Liens, and final inspection

Tenant-based rental assistance (TBRA) is a rental subsidy that helps individual households with housing costs such as rent and security deposits. Subrecipients may also assist tenants with utility deposits but only when HOME is also used for rental assistance or security deposits.

* Types: There are many types of TBRA programs.

> The most common type provides payments to make up the difference between the amount a household can afford to pay for housing and local rent standards.

^ The Section 8 Housing Choice Voucher Program is an example of a typical TBRA program. It is the model used by the majority of Subrecipients because ADFA expects Subrecipients to model their HOME-funded TBRA program after the Section 8 Housing Choice Voucher Program.

> Other TBRA programs help tenants pay for costs associated with their housing, such as security and utility deposits. (However, under the HOME Program, utility deposit assistance can only be provided in conjunction with rental assistance programs or security deposit programs.)

* How TBRA differs: HOME TBRA programs differ from other types of HOME rental housing activities in three key ways:

> TBRA programs help individual households (rather than subsidizing particular rental projects).

> TBRA assistance moves with the tenant -- if the household no longer wishes to rent a particular unit, the household may take its TBRA and move to another rental property.

> The level of TBRA subsidy varies -- the level of subsidy is based upon the income of the household, the particular unit the household selects, and the Subrecipient's rent standard (rather than being tied to the Subrecipient's high and low HOME rents.)

WHY CREATE A TBRA PROGRAM?

Parti cipating Jurisdictions (PJs) and their Subrecipients have developed TBRA programs for a wide variety of reasons to serve a wide range of functions. Some of the most common advantages of establishing a TBRA program are noted below.

Flexibility for Households

* TBRA programs offer a household the opportunity to choose its neighborhood (including the school district) as well as its type of housing (such as a single-family home, large apartment building, duplex, garden-style unit, etc.)

* If the household needs to change location, the household may take the TBRA assistance along when it moves to another rental unit.

* The TBRA may be used outside of the Subrecipient's jurisdiction but ADFA places some restrictions on this. See the Eligible TBRA Units section below for further details.

Flexibility for Subrecipients

* TBRA programs offer jurisdictions a way to meet fluctuating demand for housing. A Subrecipient may elect to provide TBRA assistance to as many or as few households as it chooses, subject to its HOME award and written agreement with ADFA and consistent with the State's Consolidated Plan.

* Also, Subrecipients may design specialized TBRA programs tailored to the distinctive housing needs of the community. This includes programs designed specifically for persons with special needs.

Cost-Effectiveness

* In communities where large public subsidies are needed to spur the new construction or rehabilitation of units, TBRA may be less expensive than using HOME for rehabilitation or new construction.

* TBRA may be particularly effective in communities with high vacancy rates, where the Subrecipient wants to make units affordable, but does not want to finance the development of additional units.

Risk Avoidance

* Financing the construction or rehabilitation of housing is inherently risky. Owners and developers can (and sometimes do) default on their financing, sending projects into foreclosure and putting the ADFA's investment at risk.

* Since TBRA programs are tenant-based, the Subrecipient can terminate the assistance if the tenant fails to meet program requirements.

* TBRA poses no long-term financial obligation to the Subrecipient.

ELIGIBLE ACTIVITIES

Subrecipients may implement the following types of TBRA programs which are eligible under the HOME Program.

Rental Assistance Programs

* The HOME rules are flexible regarding the types of TBRA programs that may be developed:

> HOME TBRA programs may be designed to serve the general objective of making housing more affordable for a wide range of low-income households within the jurisdiction.

> Subrecipients may want to create a TBRA program that serves the entire community in response to a high level of rent burden and/or a long Section 8 waiting list.

> Alternately, TBRA programs may focus on a special purpose or specific housing need. Options for special purpose programs are also described below.

* Self-sufficiency programs: Subrecipients may design their program to require HOME TBRA recipients to participate in self-sufficiency programs as a condition of rental assistance.

> Failure to continue participation in the self-sufficiency program is not a basis for terminating the assistance; however, renewal of the assistance may be conditioned on participation in the program.

> For example, the Subrecipient may operate a "bootstrap program" that provides TBRA to low-income persons who are attending job training.

* Homebuyer programs: Subrecipients may assist tenants who have been identified as a potential low-income homebuyer through a lease-purchase agreement with monthly rental payments for a period up to 36 months (i.e., 24 months, with a 12 month renewal).

> The HOME TBRA payment must be used for monthly rental and/or utility expenses.

^ TBRA assistance may not be used to create equity in the unit on behalf of the homebuyer.

^ However, all or a portion of payments made by the homebuyer may be used to build such equity.

> When the homebuyer is ready to purchase the unit, HOME funds may also be used for downpayment assistance.

* Targeted populations programs: Subrecipients may establish local preferences for special-needs groups within its broad, community-wide program, or it may design a specific program that exclusively serves one or more special needs groups.

> Examples of such special needs groups may include: ^ Elderly

^ Homeless persons;

^ Persons with disabilities in certain situations; or

^ Persons with AIDS.

> Subrecipients may offer, in conjunction with a tenant-based rental assistance program, particular types of non-mandatory services that may be most appropriate for persons with a special need or a particular disability.

> Tenant-based rental assistance and the related services should be made available to all person with special needs or disabilities who can benefit from such services.

> Participation may be limited to persons with a specific disability if necessary to provide as effective housing, aid, benefit, or services as those provided to others in accordance with 24 CFR 8.4(b)(1)(iv).

> If TBRA is provided exclusively to persons with a particular type of special need, the need must be identified in the State's Consolidated Plan for the Subrecipient's jurisdiction as an unmet need and the preference must be needed to fill the gap in benefits and services available to such persons.

Security Deposit Programs

* The Subrecipient may establish a program that limits assistance to help tenants with security deposits.

> The term "security deposit" is defined by the local or state tenant-landlord law covering the jurisdiction.

> The maximum amount of HOME funds that may be provided for the security deposit is the equivalent of two months' rent for the unit.

> Only the tenant (not the landlord) may apply for security deposit assistance.

> The security deposit may be paid to the tenant or directly to the landlord.

> The security deposit may be made as a grant or a loan. Note that ADFA prefers that PHAs set up rent and utility deposits as grants to tenants.

^ If the deposit is a loan, the terms of that loan, including provisions for repayment, should be set out in a written agreement between the Subrecipient and the tenant.

Utility Deposit Assistance

Utility deposit assistance must be provided in conjunction with a TBRA security deposit or monthly assistance program. In addition, utility deposit assistance may be used only for utilities permitted under the Section 8 utility allowance. This includes electric, gas, water and trash, but does not include telephone and cable television.

> The lease between the landlord and tenant may not contain certain prohibited lease provisions (see "Lease Requirements" later in this chapter) and must be in effect for at least one year.

Ineligible Program Activities

* Despite the flexibility the HOME Program provides for TBRA, there are a number of program activities that are ineligible for HOME TBRA assistance.

> TBRA may not be used to assist a resident owner of a cooperative. Residents of cooperatives are recognized in Arkansas as homeowners.

^ Note that, a tenant who rents from an owner of a cooperative may receive HOME TBRA.

> HOME TBRA may not be used to prevent the displacement of tenants from projects assisted with Rental Rehabilitation Program funds.

> Subrecipients may not provide HOME TBRA to homeless persons for overnight or temporary shelter.

> HOME TBRA may not duplicate existing rental assistance programs that already reduce the tenant's rent payment to 30 percent of income. For example, if the household is already receiving assistance under the Section 8 Program or a Project-based rental assistance program, the household may not also receive assistance under a HOME TBRA program.

ELIGIBLE APPLICANTS/BENEFICIARIES

As with all HOME Program activities, TBRA funds must be used to serve low-income individuals. The TBRA income requirements are more stringent than the requirements for the other HOME activities.

Income Eligibility Requirements

* Key rule: ADFA TBRA funds are limited to tenants who are at or below sixty percent (60%) of area median income. HUD establishes and periodically publishes income limits by family size for each jurisdiction. Please review and comply with these income limits.

* Timing: The Subrecipient needs to assure that the applicant is income-eligible prior to signing a contract for TBRA for the household.

* Family income: For initial eligibility purposes, family income under HOME-funded TBRA programs should be calculated using the Part 5/Section 8 definition of annual gross income. See Chapter 3: General Requirements of the HOME Program for information on income definitions in general and the Part 5/Section 8 definition in particular. Two additional resources to reference include the Technical Guide for Determining Income and Allowances for the HOME Program (located online at

http://www.hud.gov/offices/cpd/affordablehousing/library/modelguides/1780.cfm) and HUD Income & Allowances Calculator (also located online at http://www.hud.gov/offices/cpd/affordablehousing/training/web/calculator/calculator.cfm.)

> The Subrecipient must determine annual income by reviewing at least 2 months source documentation evidencing annual income (for example, wage statement, interest statement, unemployment compensation) for the family.

Note: Annual income should include all adult household members, including nonrelated individuals living in the household.

^ Income determinations for new TBRA recipients are valid for six months.

^ Eligibility criteria must be met regardless of the type of TBRA program operated by the Subrecipient (for example, security deposit, special needs, etc.)

TENANT SELECTION REQUIREMENTS

There are important requirements related to tenant selection which are outlined below.

Overview

* Subrecipients administering ADFA HOME-funded TBRA programs must have a written tenant selection policy and criteria that is consist with and is based on local housing needs and priorities established in the participating jurisdiction's consolidated plan that clearly specifies how families will be selected for participation in their programs.

* Subrecipients should adopt their Section 8 tenant selection procedures for the ADFA HOME-funded TBRA programs by certifying as such in ADFA's HOME TBRA Program Application form under Section IX.

* In general, there are two major components of tenant selection -- income eligibility and preferences. Both are discussed below.

> Income eligibility: As discussed previously in this chapter, households who receive HOME-funded TBRA must have an annual income that does not exceed 60 percent of the area median income.

> Preferences: Subrecipients can use HOME-funded TBRA programs to support a variety of local goals and initiatives. -Preferences are discussed in more detail below.

Establishing Preferences

* General community-wide program: A community-wide program can address the general need for affordable housing by giving more "buying power" to eligible low-income households. Within a community-wide program, the Subrecipient may elect to:

> Select households from the public housing authority's (PHA) Section 8 waiting list, using the PHA preference criteria; or

> Establish its own preferences and waiting list (see below).

* Community-wide programs with preferences: Through the use of local preferences, Subrecipients can target funds to meet specific needs or serve specific purposes.

> Residency preference: The Subrecipient may opt to establish a residency preference as part of its community-wide program. A residency preference requires TBRA participants to be residents of the Subrecipient's jurisdiction.

^ Subrecipients may establish a residency preference as long as the application of the preference does not have the effect of discriminating on the basis of race, color, religion, sex, national origin, handicap or familial status.

^ The Subrecipient's definition of "resident" must include persons who currently reside in the jurisdiction, and those who are currently working or have a bonafide job offer in the jurisdiction.

^ Subrecipients may not establish a requirement for minimum length of residency.

> Disabilities preference: Subrecipients may establish local preferences for all persons with disabilities within a broad, community-wide TBRA program. A Subrecipient may also target its TBRA program to persons with a particular type of disability (see below.)

> Self-sufficiency program: As discussed earlier in this chapter, Subrecipients may require HOME TBRA recipients to participate in self-sufficiency programs as a condition of assistance.

^ However, tenants living in a HOME-assisted project who receive TBRA as relocation assistance may not be required to participate in self-sufficiency programs.

* Targeted programs: As discussed previously in this chapter, Subrecipients are permitted to design local selection criteria that meet the housing needs of specific populations. Below are several examples of targeted TBRA programs.

> Preferences for persons with disabilities: Subrecipients may establish a preference for individuals with mental or physical disabilities.

^ Generally, TBRA and related services should be made available to all persons with disabilities that can benefit from such services (see above.)

^ Subrecipients may also provide a preference for a specific category of individuals with disabilities (for example, persons with AIDS or chronic mental illness) if the specific category is identified in the State's Consolidated Plan as having unmet needs, and if the preference is needed to narrow the gap in benefits and services received by such persons.

^ Preferences may not be administered in a manner that limits the opportunities of persons in a protected class. For example, a person given a preference under the TBRA program may not be prohibited from applying for or participating in other available programs or forms of assistance.

> Preferences for persons with other special needs: Subrecipients may establish a preference for individuals with special needs.

^ TBRA may be provided exclusively to persons with a particular type of special need, if the specific category of need is identified in the State's Consolidated Plan for that jurisdiction as having unmet need and the preferences is necessary to bridge the gap in benefits and services received by such persons. Examples include the elderly and battered spouses.

^ As with a general TBRA program, appropriate, non-mandatory social services may be provided in conjunction with the TBRA.

^ As stated previously, Subrecipients may require HOME TBRA recipients to participate in self-sufficiency programs as a condition of assistance. However, tenants living in a HOME-assisted project who receive TBRA as relocation assistance may not be required to participate in self-sufficiency programs.

ELIGIBLE TBRA UNITS

* The HOME TBRA program offers households great flexibility in selecting a housing unit. Households must be free to select the unit of their choice.

> Public or private: Units under the TBRA program may be publicly- or privately-owned.

> Rents must be reasonable: Subrecipients must disapprove a lease if it determines the rent is not reasonable, based on rents that are charged for comparable unassisted rental units.

> HOME-funded units are OK: Households may select units developed or rehabilitated with HOME assistance. However, the Subrecipent may not require the household to select a HOME unit as a condition of receiving TBRA.

^ In addition, Subrecipients may not require TBRA-assisted households to remain in units developed/rehabilitated under HOME.

^ Households must be permitted to move out at the end of the lease term, taking their TBRA assistance with them.

> Portability: ADFA places restrictions on moving with TBRA assistance. ADFA does not allow TBRA assisted tenants to take assistance out of a Subrecipient's jurisdiction except in the following limited circumstances:

^ TBRA tenants are relocating to accept employment outside the Subrecipient's jurisdiction, and/or

^ TBRA tenants are relocating for training opportunities that leads to employment outside the Subrecipient's jurisdiction.

^ Subrecipients must document the exceptions for all TBRA assistance issued outside their jurisdiction.

^ Additionally, inspection and re-certification requirements are applicable to tenants who relocate outside the Subrecipient's jurisdiction.

PROPERTY AND OCCUPANCY STANDARDS

While TBRA program participants are able to select a unit of their choice, certain property and occupancy standards do apply to all TBRA programs.

Section 8 HQS

* Section 8 Housing Quality Standards (HQS) must be used for HOME TBRA activities.

> Inspections to verify compliance with HQS and occupancy standards are made both at initial move-in and annually during the term of the TBRA assistance.

Occupancy Standards

Further guidance on HUD occupancy standards can be found in a Federal Register Notice from December 1998 (FR-4405-N-01 dated 12-18-98 ).

* Subrecipients must develop local occupancy standards that specify the number of bedrooms needed by households of various sizes and composition.

> ADFA expects that Subrecipients will adopt their Section 8 program policies regarding occupancy standards for the ADFA HOME-funded TBRA program they are administering.

* Eligible unit size: The occupancy standards are used to provide consistent criteria for determining the unit size for which the household is eligible.

> When the household is selected for the HOME TBRA program, the Subrecipient should counsel the household about the unit size for which the household is eligible.

^ If the household will be permitted to select a unit that is larger or smaller than the eligible unit size, the Subrecipient should explain the impact of this choice on the tenant's payment.

^ The Subrecipient may refer the household to appropriate units, but may not require the household to select the referral unit.

Lease Requirements

* ADFA expects that Subrecipients will adopt their Section 8 program lease templates for the ADFA HOME-funded TBRA program they are administering.

* Term: ADFA requires the term of the lease between the tenant and the owner to be for at least one year.

* What the lease may not say: The lease may not contain the following provisions:

> Agreement by the tenant to be sued or to admit guilt, or a judgment in favor of the owner in a lawsuit brought in connection with the lease;

> Agreement by the tenant that the owner may take, hold or sell the personal property of household members without notice to the tenant and a court decision on the rights of the parties (this does not apply to personal property left by the tenant after move-out);

> Agreement by the tenant not to hold the owner or its agents legally responsible for any action or failure to act, whether intentional or negligent;

> Agreement by the tenant that the owner may institute a lawsuit without notice to the tenant;

> Agreement that the owner may evict the tenant (or other household members) without a civil court proceeding where the tenant has the right to present a defense, or before a court decision on the rights of the tenant and the owner;

> Agreement by the tenant to waive a trial by jury;

> Agreement by the tenant to waive the tenant's right to appeal or otherwise challenge a court decision; or

> Agreement by the tenant to pay attorney fees or other legal costs, even if the tenant wins in court.

> Agreement by the tenant that requires tenant to accept supportive services (with an exception for residents in transitional housing).

* Termination: Subrecipients must establish standards for when a landlord may elect to terminate or refuse to renew the lease of a TBRA household. These standards must be in writing. They must also be included within the lease and/or in the contract between the Subrecipient and the tenant.

Notice of Termination

The requirement for 30 days' notice of refusal to renew or termination of tenancy that is required of HOME-funded rental projects does not apply to TBRA.

> The landlord may only refuse to renew or terminate the lease of a tenant residing in a HOME-assisted unit, if there is good cause.

> Good cause is defined as: repeated violation of lease terms; violation of Federal, State or local law; or for completion of the tenancy period for transitional housing.

> Tenant's failure to participate in any required supportive services of transitional housing is a permissible basis for terminating a tenancy or refusing to renew a lease.

> An increase in a tenant's income does not constitute good cause for termination of or refusal to renew, a lease.

> The landlord is required to serve written notice to tenant specifying the grounds for the action at least thirty (30) days before the termination or refusal to renew the lease.

PARAMETERS OF ASSISTANCE

HOME program rules impose some basic parameters on the level of household and Subrecipient payment, and the length of time for a single TBRA contract with a household. In addition, the Subrecipient must establish certain standards for the cost of the unit. ADFA expects that Subrecipients will adopt their Section 8 program parameters of assistance for the ADFA HOME-funded TBRA program they are administering.

Minimum and Maximum Payment

* ADFA has established a maximum TBRA assistance payment and a minimum tenant payment.

> Minimum tenant payment: The minimum payment is set at 30 percent of adjusted monthly income for housing cost (rent and utilities included), not to fall below $50.

> Maximum TBRA payment: The maximum amount that the HOME TBRA program may pay to assist any given household is the difference between 30 percent of the household's adjusted monthly income and a jurisdiction-wide rent limit (known as the payment (rent) standard). Please refer to Chapter 3: General Requirements of the HOME Program for more information about income definitions, including adjusted monthly income. Payment (rent) standards are discussed in a section later in this chapter.

Length of TBRA Assistance

* ADFA HOME-funded TBRA rental assistance contracts with individual households may not exceed one year. Contracts can be renewed for an additional year under subsequent allocations, subject to the availability of HOME funds.

* The one-year period begins on the first day of the lease and will end upon termination of the lease (if the TBRA payment is made directly to the landlord).

Program Model - Housing Choice Voucher

* ADFA requires all Subrecipients to adopt the Section 8 Housing Choice Voucher program model.

* Section 8 Voucher Program model: Under a TBRA program modeled after the Section 8 Housing Choice Voucher Program, the Subrecipient calculates the difference between 30 percent of the household's monthly adjusted income and the payment (rent) standard. This gap is then the constant amount of the monthly TBRA assistance. The household is free to select an actual unit that costs more or less than the Subrecipient's payment (rent) standard.

> Unit costing more: If the household selects a unit costing more than the payment (rent) standard, the household's monthly payment will exceed 30 percent of its monthly adjusted income. The upper limit under the Section 8 Housing Choice Voucher model limits households to paying no more than forty-two percent (42%) of its monthly adjusted income.

> Unit costing less: Using the Section 8 Housing Choice Voucher model, if the household selects a unit costing less than the payment (rent) standard, the household's monthly payment will continue to be thirty percent (30%) of its monthly adjusted income.

* If the unit rent exceeds the payment standard, the subsidy will not exceed the gap between the payment standard and 30% of household adjusted income. If the unit rent is less than the payment standard, the household will continue to contribute 30% of adjusted income to rent.

Payment (Rent) Standard

* Payment (rent) standards are established to determine the maximum HOME assistance to the tenant.

* Characteristics: The payment (rent) standard represents the rent plus utility cost of moderately priced units that meet HUD Housing Quality Standards (HQS) in the jurisdiction. The payment (rent) standard is established by bedroom size.

> The payment (rent) standard is similar to the Fair Market Rent (FMR) that is established by HUD for the Section 8 program.

> The FMR is established by HUD for individual jurisdictions, based upon the rent for standard units within that jurisdiction.

> The FMR is set at the 40th percentile of these rents (that is, just below the median rent for standard units within the community).

> In certain cases, HUD has approved a Section 8 FMR community-wide exception rent for a particular municipality, county or locality within the overall jurisdiction.

> This approval permits rents under the Section 8 Program to go as high as 120 percent of the FMR for the jurisdiction overall.

> HUD publishes the FMR in the Federal Register by bedroom size for each jurisdiction. The FMR is updated annually.

* Establishing the payment (rent) standard: ADFA expects that Subrecipients will adopt Section 8 FMRs for their HOME-funded TBRA program.

* If the Subrecipient uses another method, ADFA must be informed of this method as part of the Subrecipient's application to administer TBRA.

* Note that HOME rules require that program (rent) standards are developed using one of two methods.

> First method: The Subrecipient may develop a payment (rent) standard based on local market conditions.

Example: The published Section 8 FMR for a two-bedroom unit is $500, but the Subrecipient has analyzed the market and established that a reasonable price for a two-bedroom unit is $520, given the local market conditions and location. In this instance, the payment (rent) standard may be the $520.

> Second method: If the Subrecipient does not base its payment (rent) standard on local conditions, then the HOME payment (rent) standards must be based upon the Section 8 FMRs. The payment (rent) standard must not be less than 80 percent of the published FMRs, and not more than the FMR or area-wide exception rent.

Example: The published FMR for a two-bedroom unit is $500, and HUD has approved a six percent community-wide exception rent of $530. The payment (rent) standard established by the Subrecipient could be anywhere between $400 (80 percent of $500) and $530.

* Deciding the payment (rent) standard amount: To decide the amount of the payment (rent) standard, the Subrecipient should compare the FMR to the actual cost (including utilities) of housing in the area.

> If the FMRs are high relative to the actual cost, the Subrecipient should consider setting the payment (rent) standard at a lower amount.

> If the FMR seems appropriate, the Subrecipient should set the payment (rent) standard at the FMR.

> If the FMR is low relative to the actual cost of housing, the Subrecipient may want to develop the documentation needed to establish its own payment (rent) standard based upon the market.

> ADFA requires that all Subrecipients and/or their PHA partners develop appropriate rent comparability studies (maintain rental advertisements from newspapers on file, survey landlords in the community etc).

* Administering the payment (rent) standard: Once established, the payment (rent) standard remains constant for all units for the Subrecipient's entire program year.

Ongoing Responsibilities

* Subrecipients have significant on-going responsibilities for managing a TBRA program.

* Occupancy requirements: Primary among these responsibilities is ensuring that the property standards and occupancy requirements are still met.

Flexibility for Security Deposit Only Programs

The requirements for ongoing income determinations and HQS inspections do not apply to security deposit only programs.

> Subrecipients must conduct an annual inspection to ensure that the unit still meets HQS.

^ If the unit fails HQS, the owner must be given a reasonable period of time to make the needed repairs. Generally, allowing 24 hours for HQS violations that are an imminent health or safety threat and up to 30 days for other HQS problems.

^ If the owner does not make the needed repairs, ADFA and/or the Subrecipient can first suspend payments until the corrections are made, and then, if the owner continues to fail to comply, cancel the TBRA contract.

> Subrecipients must also ensure that the unit is the appropriate size for the household in order to meet the occupancy standard.

* Rent increases: Subrecipients must review and approve rent increases by landlords renting to tenants participating in the TBRA program. Owners may adjust rents as leases are renewed (generally annually). The Subrecipient must disapprove a lease if the rent is not reasonable.

* Income re-certification: In addition, the incomes of tenants receiving rental assistance must be re-examined at least annually using source documentation. The Subrecipient must re-evaluate family income, size and composition.

> Rent and assistance is adjusted accordingly, based on the circumstances in effect at the time of recertification.

> If a tenant's income goes above 60 percent of area median income at re-examination, assistance must be terminated after the Subrecipient gives reasonable notice, at least 30 days, to the tenant and the owner.

* Wait-list provisions: Tenants on the Section 8 waiting list who are selected to receive TBRA assistance must remain in their place on the Section 8 waiting list while receiving HOME TBRA

> ADFA requires Subrecipients to provide documentation that HOME TBRA assisted tenants have been placed and continue to keep their position on the Section 8 assistance waiting list.

* Terms of the written agreement with ADFA: Subrecipients should pay particular attention to and plan for the following terms in the agreement with ADFA:

> Expiring HOME assistance. Subrecipients must plan ahead for expiring HOME assistance. ADFA HOME assistance is not guaranteed from year to year. It is contingent upon availability of funds from HUD and ADFA's programming priorities.

^ Subrecipients must have tenants sign a statement certifying that they understand the temporary nature of ADFA TBRA assistance. Signed statement should read: TBRA is temporary assistance, depending on availability of funds. There is a possibility that rental assistance will not be renewed after the first year.

> Limited HOME assistance. Subrecipients must appropriately budget TBRA assistance. ADFA does not have additional funds to make available to Subrecipients who have overextended their budgets. Subrecipients should carefully manage the number of TBRA tenants so that they assist tenants within the parameters of the ADFA HOME award.

LEAD-BASED PAINT

* TBRA programs are subject to HUD's Lead Safe Housing Rules, 24 CFR Part 35, which requires a visual assessment of the unit and safe repair of deteriorated paint. It also has specific requirements for poisoned children. See the summary provided in the Chapter 13: Other Federal Regulations of this manual. Another resource that Subrecipients will find useful is HUD's Office of Healthy Homes and Lead Hazard Control website, http://www.hud.gov/offices/lead and Chapter 5 of CPD's reference manual, Lead Safe Housing (formerly Making it Work), https://www.onecpd.info/resource/405/making-it-work-reference-manual.

ISSUES

There are a number of issues that Subrecipients must consider when establishing a TBRA program. Each of these issues is discussed briefly below.

ELIGIBLE SUBRECIPIENTS/PROGRAM ADMINISTRATORS

* Public housing authorities: The cost to establish and manage a TBRA program can be great. With this in mind, ADFA has limited the pool of eligible Subrecipients to experienced PHAs or organizations partnered with experienced PHAs. There are a number of advantages to this arrangement:

> Experienced PHAs have the infrastructure to run and manage this type of program. This includes staffing, check processing equipment and systems, and paperwork processes.

> Experienced PHAs are familiar with and use Section 8 income limits to screen eligibility and conduct recertifications.

> Experienced PHAs already conduct HQS inspections for occupancy and housing quality.

* PHAs are expected to run TBRA programs that complement or parallel their normal Section 8 program, because of unmet demand in the community (as evidenced by a long or closed waiting list) and administrative ease (due to staff familiarity with the requirements and procedures of its Section 8 program.)

* Subrecipents may wish to establish specialized program that focus on particular types of households (examples are homeless persons, persons with disabilities, or persons with AIDS). These programs must be modeled after the Section 8 program and must be staffed by the experienced PHA partner.

ANNUAL SUBSIDY ASSISTANCE BUDGET

* Subrecipients must provide an annual estimate, a budget, of one year of TBRA assistance to program participants. See Exhibit 7-1 for Sample Methodology for Extrapolating Annual Subsidy Requirement from Estimated per Family Subsidy Requirements.

EXHIBIT 7-1: Sample Methodology for Extrapolating Annual Subsidy Requirement from Estimated Per Family Subsidy Requirements

Step 1: Calculate the expected average contribution of families on the program waiting list:

Step 2: Calculate the expected average monthly subsidy based on expected average contribution and the PHA's payment (rent) standard

Step 3: Multiply the expected average monthly subsidy by the number of families the PHA expects to serve. For this example, the PHA is expected to serve 100 families.

Step 4: Multiply the monthly subsidy requirement by 12

* Subrecipients should add a contingency cushion against the following possibilities:

> Income of participating families is below the estimated average;

> Income of participating families fluctuates during the term of the lease and the rent assistance is increased during the program year; and

> Contributions towards security deposits, if any.

* Annual subsidy requirement estimates must be submitted by the Subrecipient at the time of application to administer an ADFA HOME-funded TBRA Program.

PROGRAM ADMINISTRATION FUNDS

* The cost of administering HOME-funded TBRA cannot be included in the annual subsidy requirement. Administration costs have to be requested and charged separately.

* Subrecipients can request administration funds not to exceed:

> $120 for processing each tenant application; and

> $20 per tenant per month for on-going administration expenses.

* Administration funds are based on an estimate of the number of tenants served by the Subrecipient's program (new and continuing). ADFA requires Subrecipients to report new and continuing tenants served on the TBRA Administrative Fees Request form.

> TBRA Set-Up and Environmental Certification forms should accompany the TBRA Administrative Fees Request. The Set-Up and Environmental Certification forms should be used to report:

^ New tenants; and

^ Tenants with changes in the details of their ADFA TBRA assistance.

> Subrecipients should submit ADFA's TBRA Administration Fees Request form along with the TBRA Set-Up and Environmental Certification forms monthly.

> Requests for TBRA assistance subsidies should also be submitted monthly using the HOME Program Payment Certification Voucher.

* Administration funds are capped by the amount requested in the Subrecipient's application to ADFA.

> ADFA does not have additional funds to make available to Subrecipients who draw down all their administration funds before the end of the program year.

> Subrecipients must plan for and use their administration funds appropriately.

DETERMINING THE TYPE OF PROGRAM TO OFFER

* As noted in Part I of this chapter, ADFA requires that Subrecipients use the Section 8 Housing Choice Voucher model for its TBRA program.

* Using the Section 8 model: ADFA's rationale for requiring use of the Section 8 Housing Choice Voucher model is the following:

> The Section 8 programs have a successful track record. Using the Section 8 model cuts down the amount of time it would take to thoughtfully design a new program.

> PHA familiarity with the Section 8 Housing Choice Voucher model makes ADFA's TBRA program efficient and effective.

> The program will likely be used by the same set of landlords who participate in the Section 8 Program.

> The rental assistance payment goes directly to the landlord under the Section 8 Program. Therefore, the landlord knows that the program's share of the rent is guaranteed.

> Subrecipients may use HOME to assist families by paying for not only monthly rent and utilities, but also security deposits and utility deposits. (Remember: under HOME, utility deposit assistance may only be provided in conjunction with a TBRA security deposit or monthly assistance program).

> ADFA expects that Subrecipients will adhere to existing Section 8 Housing Choice Voucher policies and procedures to the greatest extent possible.

^ Note that all policies and procedures are submitted to ADFA annually when Subrecipients apply to administer ADFA HOME-funded TBRA Programs.

^ Also note that Subrecipients must choose to adopt either the ADFA Sample Forms or their current Section 8 Housing Choice Voucher Forms to use for their ADFA TBRA program. Once adopted, Subrecipients cannot switch forms mid-program. They must use the forms adopted and approved with their application.

^ ADFA reviews and approves policies and procedures at that time. Subrecipients cannot change or adopt new policies and procedures mid-program.

Caution on Security and Utility Deposit Payments

Security deposit only (or security and utility deposit only) programs are attractive because limited funds can be used to serve more families. However, they may not provide enough assistance. Many families who cannot afford the security deposit also cannot afford the monthly rental payments.

CALCULATING THE RENTAL SUBSIDY

One of the most important decisions Subrecipients must make with regard to TBRA programs is how to calculate the tenant and HOME contributions to rent.

* Three important factors affect the HOME assistance (and the household's) payment:

> The family's income -- the lower the family's income, the higher the HOME assistance payment;

> The payment (rent) standard the Subrecipient establishes for each bedroom size; and

> The cost of housing and utilities for the unit the family selects.

Using the Section 8 Housing Choice Voucher Model

* The Housing Choice Voucher Program model provides a HOME assistance payment that meets the gap between thirty percent (30%) of a households AMI and the cost of the unit.

> The maximum HOME subsidy is calculated based on the households income and the rent of the unit selected by the household..

> Using the Section 8 Housing Choice Voucher method, the Subrecipient first establishes a payment (rent) standard for the program as a whole.

> The HOME assistance payment is generally the difference between the thirty percent (30%) of the tenant's adjusted monthly income and the actual unit rent, not to exceed forty-two percent (42%) of the households monthly adjusted income.

EXHIBIT 7-2

The Cleavers have been issued a two-bedroom HOME TBRA Voucher. Their annual adjusted income is $18,300 and their monthly adjusted income is $458. The Subrecipients' rent standard for two-bedroom units is $775.

The maximum TBRA assistance payment for the Cleaners is:

If the Cleavers find an apartment that rents for $800 (including utilities), the Cleaver's share of the rent is:

In this example, the Cleavers will pay more than 30 percent of their adjusted income for housing because they selected a unit that rents for more than the payment (rent) standard. The Cleavers are only paying 32 percent of their adjusted income, which does not exceed the upper limit.

If the Cleavers find a very inexpensive unit, the ADFA requirement that the family must pay at least 30 percent of monthly adjusted income might apply.

However, the Cleavers must pay at least 30 percent of monthly adjusted income per ADFA's minimum tenant contribution requirement:

$18,300 / 12 months x 0.30 = $458

Given the minimum tenant contribution requirement, the program administrator's contribution is now:

Utility Allowances

* To determine the portion of the housing cost that will be paid by the HOME assistance and the portion that will be paid by the household, the Subrecipient must establish a utility allowance schedule that estimates the average cost of utilities for typical types of housing (single-family, row house, high-rise, etc.) and for various utilities and fuel sources (gas, oil, electricity). (See Exhibit 7-3(a).)

> Utilities included in the schedule generally include those required for water/sewer, electric, gas and trash.

> Telephone and cable TV are not considered utilities for this purpose.

> ADFA will utilize the HUD Utility Schedule Model to determine the utility allowances for each TBRA project on an annual basis or by the otherwise determining the allowance based upon the specifics utilities used at the project.

> ADFA will require that Subrecipients utilize the HUD Utility Schedule Model utility allowances provided by ADFA. Subrecipient will not be permitted to use the utility allowance published by the local PHA.

EXHIBIT 7-3(a)

USING UTILITY ALLOWANCES

ADFA is committed to support and build capacity in ADFA-approved Community Housing Development Organizations (CHDOs) that have capacity and agree to develop quality affordable housing throughout the State of Arkansas. A CHDO is intended to respond to a specific community's needs. ADFA continues to encourage qualified nonprofit organizations to apply for certification as a CHDO.

CHDO SET-ASIDE REQUIREMENT

ADFA will reserve not less than fifteen percent (15%) of the HOME allocation for investment only in affordable housing developed, owned or sponsored by CHDOs, its subsidiary or a partnership of which the CHDO or its subsidiary is the managing general partnership. In order to be eligible for the set-aside, the CHDO must have effective project control acting in any of the specified capacities.

* A Community Housing Development Organization (CHDO) is a private nonprofit, community-based service organization that has obtained or intends to obtain staff with the capacity to develop affordable housing for the community it serves.

* ADFA sets aside a minimum of 15 percent of their HOME allocations for housing development activities in which qualified CHDOs are the owners, developers and/or sponsors of the housing. ADFA must have a reasonable expectation of specific projects going forward.

* ADFA requires qualified CHDOs to apply for CHDO set-aside funds once every 2 years. In the event that a CHDO fails to meet this requirement, ADFA will not recertify the organization as a CHDO.

Reservation of Set-Aside of Funds for CHDOs

* ADFA has up to 24 months from the date HUD notifies ADFA that HUD has signed the HOME Investment Partnership Agreement transmittal letter to identify and designate the CHDOs they plan to work with and to commit monies for the CHDOs' use.

> ADFA may set aside more than 15 percent of their funds for housing owned, developed or sponsored by CHDOs.

> CHDOs may engage in other HOME-eligible activities in which they are not the owners, developers or sponsors of the housing. However, the HOME funds committed to those activities will not count toward the set-aside and ADFA may not fund such activities unless the CHDO is also developing units of affordable housing.

> The CHDO commitment of funds cannot be made by ADFA before specific projects are identified.

CHDO QUALIFYING CRITERIA

To qualify for the CHDO set-aside, ADFA must certify a nonprofit agency as a CHDO each time it commits funds to that organization for a specific project. ADFA accepts applications for CHDO set-aside on a continuous basis. The requirements for certification are discussed in this section of the manual.

* A CHDO is a specific type of private nonprofit entity. CHDOs must meet certain requirements pertaining to their:

> Legal status;

> Organizational structure; and

> Capacity and experience.

* HUD Notice CPD 97-11 (included in the Appendix) details these requirements.

Note: HUD will issue new guidance and update CDP 97-11 but has not been issued yet. Legal Status

* Organized under State/local law: CHDOs must be organized under State and local law.

* Purpose of organization: Provision of decent housing that is affordable to low- and moderate-income persons must be among the purposes of the organization. This commitment must be evidenced in the CHDO's:

> Charter;

> Articles of incorporation;

> By-laws; or

> A resolution of the CHDO's board of directors.

* No individual benefit: No part of the CHDO's earnings (profits) may benefit any members, founders, contributors or individuals.

* Clearly defined service area: A CHDO should have a clearly defined geographic service area.

> CHDOs do not need to represent a single neighborhood.

> For urban areas, a CHDO may include in its service area a neighborhood or neighborhoods, city, county, or metropolitan area.

> For rural areas, a CHDO may include in its service area a neighborhood or neighborhoods, town, village, county or multi-county area (but not the entire State.)

> Nonprofits serving special populations must also define the geographic boundaries of their service areas in order to qualify as CHDOs.

* Nonprofit status: A CHDO must have received a tax-exempt ruling from the IRS under Section 501(c)(3) or (4) of the Internal Revenue Code of 1986 in order to be designated by the PJ as a CHDO.

> IRS standards for granting a 501(c)(3) or (4) designation for housing development organizations are narrowly applied, lengthening the time it can take to receive a 501(c)(3) or (4) designation.

^ Designation can take nine to 24 months.

^ The timeframe varies by IRS region.

> Conditional designation: The IRS will usually grant new applicants a conditional designation of 501(c) status, valid for a specified period of time (usually three years.)

^ During that period of time, the organizations may operate legally as 501(c) organizations, with all benefits pursuant to that designation, while the IRS monitors their operations.

> Final designation: Assuming they operate in compliance with applicable regulations during this period, the IRS will grant them final 501(c) designation.

> The ADFA requirement for a 501(c) designation can only be fulfilled by having a final designation from the IRS.

Pending 501(c) Status

Remember, documentation that the CHDO has an application for 501(c) status pending at the IRS will not suffice to fulfill the nonprofit status requirement.

Organizational Structure

* The CHDO is intended to respond to a particular community's needs. Therefore, the structure of the board of directors of a CHDO is viewed as the main indicator of community control over the CHDO.

> The CHDO board must be composed as follows:

^ At least one-third must be representatives of the low-income community.

^ No more than one-third may be public officials or employees of the PJ or State Recipient.

^ The balance is unrestricted, and may include people such as human and social service providers, lenders, individuals with access to philanthropic resources, or others willing to contribute their professional expertise.

> There are also maximum limits on representation and control by a for-profit entity when the CHDO is sponsored by a for-profit entity.

> A governmental entity may create a CHDO, but the CHDO cannot be controlled by the governmental entity.

* Low-income community representation: As noted above, a minimum of one-third of the board must consist of representatives of the low-income community.

* There are three ways to meet this requirement:

ISSUES

This section discusses the steps ADFA takes to select qualified CHDOs as well as ways ADFA may assist CHDOs in growing their capacity.

SELECTING CHDOs

ADFA is actively seeking qualified nonprofit organizations interested in promoting the development of affordable housing opportunities in the State of Arkansas to become ADFA certified CHDOs. ADFA accepts requests for certifications on a continuous basis and may elect to seek out potential applicants.

* Three steps: There are three steps to finding and qualifying the right nonprofit organizations to become CHDOs.

> Step 1: Identify the existing nonprofits in communities.

> Step 2: Determine whether the nonprofits are eligible based on HUD criteria.

> Step 3: Assess whether the nonprofits are capable of performing desired CHDO activities.

* The steps are discussed below.

Step 1: Identify Potential CHDOs

* To start the process of identifying and qualifying CHDOs, ADFA may do a number of things.

> Invite community development corporations (CDCs) and other nonprofits to an information session about the HOME program and CHDO provisions.

> Promote the benefits of CHDO designation, including:

^ Availability of a specific HOME set-aside for affordable housing activities; and ^ Use of HOME funds for operating expenses and pre-development costs.

> Meet individually with groups likely to be designated as CHDOs, or that ADFA will work with to obtain CHDO designation.

* A list of the different types of organizations to contact regarding potential CHDOs is provided as Exhibit 8-1.

EXHIBIT 8-1 POTENTIAL CHDO CONTACTS

* Existing CDBG subrecipients

* Lending institution referrals

* State housing finance agency referrals

* State community development agencies

* Community foundations/philanthropies

* United Way and other community fund drives

* Corporate foundations

* National housing intermediary organizations, such as:

> Neighborhood Reinvestment Corporation

> Local Initiatives Support Corporation

> Enterprise Foundation

* National nonprofit associations, such as:

> National Congress for Community Economic Development

> National Association of Community Action Agencies

> Housing Assistance Council

* State-wide and local nonprofit agencies and service providers

* National and local nonprofit advocacy organizations

* Community land trusts_______________________________________

Step 2: Determine Eligibility

* Once the CHDO candidates are identified, the candidates must complete and submit information on the "CHDO Checklist" contained in Notice CPD 97-11. This notice is included in the forms section of the manual.

* ADFA must determine whether organizations meet the CHDO qualifications outlined in the HOME regulations. (The eligibility criteria were discussed in Part 1 of this chapter.)

Step 3: Assess CHDO Capability

* Once an organization has been determined eligible as a CHDO, ADFA must ascertain whether the CHDO is actually capable of carrying out the responsibilities of a CHDO.

* Assessing capacity: There are a number of questions to ask when assessing an organization's capacity. Asking these questions will help ADFA determine which organizations are qualified and capable of carrying out CHDO-eligible activities, and which ones need to make changes or build capacity to quality.

> Organizational issues:

^ What is the primary business of the organization?

^ Does the firm have a mission statement?

^ What is the composition of the board?

^ What is relationship of the board to the staff?

^ How long has the organization been in operation?

^ How have the services or programs changed since the organization began?

^ Is there a current business plan?

> Experience and capacity:

^ Does the nonprofit have the housing experience appropriate to the role the CHDO expects to play (owner, developer, sponsor)?

^ Has the nonprofit produced successful affordable housing projects?

^ What is the current status of projects funded in previous years?

^ Are affordable past rental projects still occupied by lower-income tenants? If not, why?

^ Are the past projects well-maintained?

^ Are tenants pleased with the project development and management?

> Finance and accounting standards and procedures:

^ What is the current annual operating budget? How about the last three years?

^ Operating funds come from what sources?

^ Are these funding sources likely to continue?

^ Is the CHDO audited by a certified public accountant as evidenced by audit reports?

^ Is the organization financially solvent?

^ Who maintains the organization's accounting records?

^ Are financial records maintained manually or is computer software used?

^ Does the organization have insurance?

> Staffing issues:

^ Who is the director? What are his/her housing/development experience and capabilities?

^ How many paid staff members are there?

^ Who are the staff members? What housing/development experience and capabilities do they have?

^ What is the organizational structure?

^ Is there much staff turnover?

^ Does the organization have staff training and evaluation procedures in place?

BUILDING CHDO ELIGIBILITY AND CAPACITY

Based on the results of ADFA's search for qualified organizations and assessment of capacity and experience, ADFA may need to help particular nonprofits become eligible as CHDOs or develop greater capacity to carry out CHDO-eligible activities.

Building Eligibility

* The following table specifies critical eligibility issues that may have to be addressed in order to qualify a nonprofit organization as a CHDO:

Notes of Caution

AFDA must carefully avoid controlling organizations they charter.

> Remember that AFDA may not assign staff to a CHDO on either a full or part-time basis in order to fulfill the CHDO's capacity requirements.

> CHDOs may not pay ADFA for any technical assistance and/or training the ADFA provides.

CHDO ELIGIBILITY CONSIDERATIONS

Building Capacity

* Eligibility is only part of the story. CHDOs must also have capacity to undertake and complete projects within 12 months of the HOME project commitment.

* Existing CHDOs: Building improved capacity within existing CHDOs requires a variety of approaches. Examples may include:

> Good business planning: Just like emerging for-profit enterprises, nonprofits must develop and follow a sound business plan.

> Sufficient capital: Adequate capital to sustain the nonprofit's housing efforts and operating needs is essential.

> Keen marketing/customer knowledge: Nonprofit organizations, just like their for-profit counterparts, must know their markets and their customers.

> Technical expertise: Good business planning, customer knowledge and sufficient operating capital allow the nonprofit to get to the development stage. But the nonprofit must still "deliver the goods." This requires the appropriate skills and expertise.

> Strong leadership and staffing: Ultimately, it is the people -- especially the leadership --within the organization that make the difference.

* New CHDOs: There may also be a need to create new CHDOs to make use of the set-aside in future years. Creating new organizations to qualify as CHDOs makes sense where:

> No CHDOs exist;

> Potential groups don't want to get into bricks-and-mortar projects, which are the only types of projects eligible as CHDO activities; or

> Qualified groups do not have sufficient capacity to make prudent use of the set-aside funds.

* Starting a nonprofit: ADFA may start a nonprofit that will qualify as a CHDO.

> This is an opportunity to create an organization structured especially to carry out HOME projects. However, as previously discussed, organizing a nonprofit is neither simple nor quick.

> Coming up with the requisite one-year experience can be problematic. However, during the time it takes to process the nonprofit's articles of incorporation and obtain an IRS ruling, the organization can begin to function in ways that count toward its service record.

BUILDING LONG-TERM RELATIONSHIPS WITH CHDOs

* Building the capacity of the system: ADFA can do a great deal to help CHDOs build their capacity. However, there are instances that ADFA will find that the need to build capacity exceeds their resources. For this reason, HUD provides technical assistance and training through consultants and national intermediaries.

> Training: HUD provides training on the provisions of the HOME program through a three-year contract with training consultants. This training will include topics of interest to CHDOs.

> Technical assistance: HUD also administers a technical assistance program geared toward CHDO capacity-building. Through contracts with national, regional, state and local nonprofit housing intermediary organizations, HUD provides assistance on:

^ Organizational support: to cover operational expenses, and expenses for training and legal, engineering and other forms of technical assistance that the CHDO staff, board or members may require;

^ Housing education: for CHDOs to provide or administer programs to educate, counsel, and/or organize tenants and homeowners eligible for HOME assistance;

^ Program-wide support: technical assistance, training and continuing support for CHDOs to manage and conserve property developed with HOME assistance;

^ Benevolent loan funds: technical assistance to increase local ability to attract private investment in benevolent (below-market) loan funds for affordable housing development;

^ Facilitating women in home-building profession: technical assistance to businesses, unions and organizations involved in rehabilitation and construction of housing in low/moderate income areas to help women residing in these areas obtain jobs involving such activities;

^ Community development banks and credit unions: technical assistance to help establish privately owned community financial institutions that can finance the development of affordable housing; and

^ Developing community land trusts: funds to community land trusts for organizational support, technical assistance, education, training and continuing support, or to community organizations to establish a community land trust.

* Establishing a shared vision: To sustain a long-term, successful partnership, ADFA must have an understanding with each CHDO of their common goals and expectations. Some good steps to take:

> Identify areas of common interest;

> Establish shared goals;

> Define roles; and

> Clarify expectations -- both short-term and long-term.

* Monitoring partnership performance: The process of reviewing and evaluating the performance of the partnership should be an ongoing one. This process will help to identify strengths and weaknesses in CHDO operations and the support systems necessary for CHDOs to operate and for the HOME program to succeed.

> This information should be reviewed on an ongoing basis for the purposes of identifying what needs to be changed, and for securing the appropriate technical assistance and training needed to do so.

> The level, type and areas of need will vary from CHDO to CHDO, and, within CHDOs, from year to year. By evaluating the performance of CHDOs over time, technical assistance and capacity-building will be fluid processes that remain relevant to the needs of the HOME program.

> Evaluation: An evaluation of CHDO performance may include a review of the following factors:

^ Completion of funded projects;

^ Timeliness and ability to complete projects within established budget parameters;

^ Human resources;

^ Adequate financial resources;

^ Ability to leverage other resources;

^ Adequate financial systems;

^ Board operations;

^ Strategic plans;

^ Organizational work plans;

^ Record-keeping;

^ Compliance with HOME targeting requirements; and

^ Board composition and operations.

LIST OF ADFA FORMS

ADFA has all required CHDO forms on their website, www.arkansas.gov/adfa These forms include:

* CHDO Certification Checklist/Application

* CHDO Recertification Checklist

OVERVIEW

The general HOME Program rule is that each PJ and its Recipients must establish and maintain sufficient records to document that HOME program requirements are met. The HOME regulations define the minimum records retention requirements, and are intended to cross-cut with the basic program requirements. As a HOME PJ, ADFA has established its own requirements for record-keeping and reporting by nonprofits and other HOME Recipients. These requirements enable ADFA to meet HUD requirements and maintain complete information about the projects for which it provides funding.

* Recent changes: Under the HOME Final Rule, the requirements for record-keeping are designed to:

> Ensure consistency with HOME program requirements;

> Clarify the record retention periods; and

> Include new records that must be kept by a PJ and their Recipients that exercise any of the three new options allowed in the Final Rule (i.e., multi-family refinancing, presumption of affordability for homebuyer assistance, and locally-established 95 percent of area median purchase price limits).

* Categories: The HOME regulations define the following record-keeping categories:

> Program records;

> Project records;

> CHDO records;

> Financial records;

> Program administration records; and

> Records concerning other Federal requirements.

* Record-keeping and monitoring: All ADFA HOME Program Recipients will regularly be monitored for HOME and ADFA program compliance requirements. Because ADFA monitors Recipients to ensure they are meeting requirements by conducting a thorough review of each Recipient's records and files, it is essential that each HOME program Recipient establish and regularly update their files in accordance with guidance provided below.

RECORDS THAT MUST BE MAINTAINED

This section outlines the records that must be maintained by HOME Program Recipients by category. Record-keeping requirements vary depending on the type of HOME activity being undertaken (i.e. TBRA or Rental), as well as the type of HOME Program Recipient undertaking the HOME project (i.e. CHDO or State Recipient.)

Program Records

The following program records must be maintained:

* Written agreement with ADFA and documentation of compliance with the written agreement;

* A copy of the application originally submitted to ADFA;

* Forms of assistance used;

* Procedures for establishing 95 percent of median value;

* TBRA Program records, including:

> Consolidated Plan TBRA certification;

> Market Conditions/Needs Assessment;

> Selection policies and criteria;

> If using preferences for persons with special needs, supporting documentation on categories used;

> Rent standards and minimum tenant contribution;

> Compliance with requirement that 90 percent of assisted families have incomes at or below 60 percent of median (Note: ADFA requires 100% of households be at or below 60% AMI for TBRA and rental projects);

* Subsidy layering documentation; and

* Documentation of compliance with ADFA matching requirements.

Project Records

Each HOME Program Recipient is responsible for maintaining records that are project-specific. The project records that must be maintained include:

* Description of each project:

> Location (address and/or legal property description) (with a map),

> Form of assistance,

> Number and identification of units or tenants associated with HOME.

* Source and application of funds to include eligibility and permissibility of projects costs;

* Compliance with underwriting evaluation, maximum per-unit subsidy limits and subsidy layering guidelines;

* Compliance with property standards and lead-based paint requirements upon completion and for the duration of the affordability period;

* Compliance with income-eligibility requirements;

* For TBRA, compliance with written tenant selection policies, lease provisions and other applicable requirements;

* For rental projects, compliance with income targeting, affordability, lease requirements and financial condition with 10+ units;

* If multi-family or single-family refinancing is provided, compliance with established guidelines and/or requirements;

* If multi-family new construction, results of the site and neighborhood standards review conducted;

* For homeownership projects, compliance with maximum property value and affordability requirements; and

* If pre-award costs, compliance with applicable requirements.

CHDO Records

There are additional records that ADFA's CHDOs (when undertaking CHDO-eligible activities) must maintain. These CHDO records include:

* Written agreement with ADFA;

* Documentation of qualification as a CHDO, including:

> Documentation of nonprofit status;

> Documentation of paid staff with demonstrated relevant experience in undertaking the specific project for which the CHDO set-aside funds are being awarded;

> Current board list that identifies low-income representation;

> Documentation of low-income community input (e.g. minutes from community meeting);

> Documentation of organizational capacity (e.g. resumes of staff members);

> Documentation of Targeted Geographic Service Area(s) (with map);

* Documentation of uses of CHDO set-aside funds, including funds for capacity-building (if applicable); and

* Current project descriptions.

Financial Records

The following financial records must be maintained:

* Source and application of funds;

* Treasury and local HOME accounts;

* Source and application of program income, repayments and recaptured funds; and

* Budget control measures, including periodic account reconciliations.

Program Administration Records

These program administration records must be maintained:

* Compliance with written agreements;

* Copies of written policies, procedures, and systems, including risk assessments and a system for monitoring entities;

* Compliance with applicable uniform administrative requirements; and

* Inspections, monitoring reviews and audits, and resolution of any findings or concerns.

Documentation Records

Records documenting compliance with the following additional Federal requirements must also be maintained:

* Equal opportunity and fair housing;

* Affirmative marketing and minority/women's business outreach;

* Environmental review;

* Acquisition, relocation, displacement and replacement of housing;

* Labor standards;

* Lead-based paint;

* Conflict-of-interest; and

* Debarment and suspension.

RECORD RETENTION

* The record retention period is five (5) years. This is in keeping with Consolidated Plan requirements.

* Rental: For rental housing records:

> General records must be kept for five years after project completion; and

> Tenant income, rent and inspection information must be kept for the most recent five years, until five years after the affordability period ends.

* Homeownership: Homeownership records must be kept for:

> Five years after project completion; and

> For resale/recapture records, five years after the affordability period ends.

* TBRA: TBRA records must be kept for five years after rental assistance ends.

* Written agreements: Generally, all written agreements must be maintained for five years after the agreement ends.

> Displacement and acquisition: Displacement and acquisition records must be kept for five years after final payment to displacees.

ACCESS TO RECORDS

* ADFA and its HOME Program Recipients must provide citizens and other interested parties with reasonable access to records. Access must be consistent with applicable state and local laws regarding privacy and obligations of confidentiality.

* The Consolidated Plan regulations require that every HOME PJ, including ADFA, provide citizens, public agencies and other interested parties with reasonable and timely access to information and records relating to a PJ's Consolidated Plan and the use of assistance under the programs covered by the Consolidated Plan. These same requirements apply to HOME Program Recipients. Therefore, each Recipient should be able to produce organized records in a timely fashion upon request.

* HUD and the Comptroller General of the United States, or any of their representatives, have the right to access any records of PJs and Recipients for auditing, excerpt or transcript purposes.

REQUIREMENTS

BACKGROUND AND OVERVIEW

HOME Program regulations require ADFA, as the PJ, to submit an annual report, called the Consolidated Annual Performance and Evaluation Report (CAPER), to HUD within 90 days of the close of ADFA's program year. This is in accordance with the Consolidated Plan regulations at 24 CFR Part 91. The CAPER incorporates not only HOME Program information, but also the reporting requirements for the Community Development Block Grant (CDBG), Housing Opportunities for Persons with AIDS (HOPWA) and Emergency Shelter Grants (ESG) programs.

* HOME Program Recipients: Each ADFA HOME Program Recipient is required to meet certain reporting requirements, which are outlined below, in order to support ADFA in meeting its annual HOME Program reporting requirements.

* What performance reports must include: The CAPER must include both a summary of programmatic accomplishments and an assessment of progress toward the priority needs and specific objectives set forth in ADFA's Consolidated Plan.

> The report should include:

^ A summary of resources and programmatic accomplishments; and

^ The status of actions taken during the year to implement the overall strategy, which includes a self-evaluation of progress during the past year in addressing priority needs and specific objectives.

REPORTS REQUIRED BY ADFA

ADFA requires that Recipients complete Semi-annual Status Reports as well as Project Set Up and Completion Reports for all projects.

Semi-annual Status Report

* Each HOME Program Recipient is required to complete and submit a Semi-annual Status Report to ADFA for all open projects. This report should include, at a minimum, the following sections:

> Narrative. A narrative section outlining project milestones achieved;

> Funding. A funding status update including all draws; and

> Issues/Concerns. The report should outline any issues or concerns that may require ADFA assistance.

Project Set Up and Completion Reports

* HUD Project Setup and Completion Reports. Upon project completion, all HOME Program Recipients are required to submit a Project Setup and Completion Form to ADFA with request for retainage payment. If the rental unit is vacant at the time of retainage request, the program Recipient must resubmit completion data within 120 days the household characteristics once the unit has been leased.

> The forms used differ by activity (Rental, Homeowner Rehab, Homebuyer or TBRA) and are available on ADFA's website.

> ADFA Program Staff will enter the data provided by all Recipients into the IDIS system and report completed projects to HUD.

> For rental projects, the HUD Rental Housing Project Completion Report is also required by ADFA.

* ADFA HOME Projects/Programs Place in Service/Funded. HOME Program Recipients are also required to fill out and submit this form to ADFA upon project completion.

RECIPIENT MONITORING RESPONSIBILITIES

To meet reporting requirements, Recipients must monitor their projects for HOME Program compliance and document the results. Monitoring reports should be kept in each project file. Monitoring responsibilities vary based on the activity.

* Owner Occupied Projects (Homeowner Rehabilitation and Homebuyer): Recipients are required to monitor owner occupied projects for principal residency throughout the affordability period. See Chapters 4 and 5 for more information.

* Rental Projects: Recipients (if applicable) are required to monitor rental projects for the following factors, all of which are described in more detail in Chapter 6: Rental Housing Activities.

> Occupancy (income requirements);

> HOME Rents; and

> Property standards (units must meet HQS.)

* Tenant Based Rental Assistance: Recipients are required to monitor TBRA projects for two factors, both of which are described in depth in Chapter 7: Tenant Based Rental Assistance.

> Household income; and

> Property standards (units must meet HQS.)

LIST OF FORMS

ADFA has all record keeping and reporting forms available on their website, www.arkansas.gov/adfa. These forms include:

* TBRA Set Up Form HOME Program

* Homebuyer Set Up and Completion Form HOME Program

* Homeowner Rehab Set Up and Completion Form HOME Program

* Rental Set Up and Completion Form HOME Program

* HOME Projects/Programs Placed in Service/Funded Current Fiscal Year

CONSTRUCTION

This part is comprised of two sections. The first section relays HOME regulations and requirements related to property standards. The second briefly covers the Other Federal and State requirements.

STANDARDS MANDATED BY HOME REGULATIONS

* Property standards are required in the HOME Program to achieve two major purposes:

> Set a minimum standard for habitability/functionality, for purposes of inspecting and specifying necessary improvements listed in the scope of work; and

> Establish materials, methods, and standards for any work to be performed.

* The property standards that are applicable to the ADFA HOME Program are described briefly below. Also, while Exhibit 11-1 graphically illustrates the applicability of the property standards to the various ADFA HOME activities, please refer to each activity chapter for the details related to property standards.

Housing Codes/Standards

* Housing codes/standards specify the basic living and structural conditions for existing properties. They are used to determine if an existing residence is habitable and identify health and safety conditions.

* Housing codes/standards are used as the basis for initial inspections of existing properties to identify needed repairs and appropriate improvements. Their purpose is to ensure that existing housing is not occupied unless it is decent, safe, and sanitary. The properties must meet the property standards established in 24 CFR 5.703 (Uniform Physical Condition Standards).

* Housing must meet the accessibility requirements of 24 CFR part 8, which implements Section 504 of the Rehabilitation Act of 1973, Americans with Disabilities Act implemented at 28 CFR parts 35 and 36, as applicable, and the Fair Housing Act as implemented at 24 CFR 100.205.

* Housing must be constructed to mitigate the impact of potential disasters in accordance with State, local codes, ordinances or other requirements as HUD may establish (where applicable).

* Construction of all manufactured housing including manufactured housings that replaces an existing substandard unit under the definition of "reconstruction" must meet the Manufactured Home Constructions Safety Standards codified at 24 CFR part 3285.

* ADFA has Multi-Family Housing Minimum Design Standards that must be used in designing multi-family developments.

> For multifamily rental housing projects of 26 units or more, a capital needs assessment will be required to determine all work that will be performed in the rehabilitation of the housing and the long-term physical needs of the project.

> Waivers can be requested for rehabilitation developments if structural constraints prohibit adherence to the minimum design standards. Waiver requirements are detailed as part of ADFA's Minimum Design Standards.

Building Codes

* Building codes are a series of requirements that specify how new construction or rehabilitation work is to be carried out. They inform contractors about how to do the work and are used by inspectors to check completed work.

> Arkansas building codes are mandatory statewide, but local jurisdictions may amend the codes to make them more stringent. ADFA requires that Recipients, owners, sponsors, and developers comply with the building codes adopted in their jurisdiction.

> In the absence of an applicable State or local code, projects must meet the International Code Council's (ICC's) International Residential Code or International Building Code.

* A number of related codes, such as the fire code and plumbing code, are incorporated into the Arkansas building codes.

* Most work governed by building codes requires that licensed contractors obtain permits prior to starting the work.

* A building permit alerts building officials and inspectors to the fact that certain types of construction are about to begin and completed work must be inspected to determine if it meets requirements.

* Construction of all manufactured housing including manufactured housing that replaces an existing substandard unit under the definition of "reconstruction" must meet the Manufactured Home Constructions Safety Standards codified at 24 CFR part 3280.

Rehabilitation Codes

* Rehabilitation codes provide specific guidance about applying building codes to guide repair, remodeling, and rehabilitation of existing structures. Appendix J of the International Residential Code provides the minimum requirements for existing structures being rehabilitated.

* They serve the same purpose as building codes, but are moderated to be reasonable approaches to existing conditions because it would be very expensive (perhaps impossible) to renovate an existing older building to meet the same standards for new constructed buildings.

Rehabilitation Standards

* A rehabilitation standard defines the quality of materials and workmanship that must be used when a particular repair is made. Rehabilitation standards (sometimes called construction standards) speak to the quality, durability, and aesthetics of the end product.

* They define what methods and materials are eligible for HOME payment.

* ADFA has adopted written rehabilitation standards for rehabilitation of owner-occupied units, for rental rehabilitation projects, and for purchase/rehab of units for homebuyers, whether the work is done by Recipients, contractors, or nonprofits.

> Health and Safety - Must identify life-threatening deficiencies that must be addressed immediately, if housing is occupied.

> Uniform Physical Condition Standards -- The properties must meet the property standards established in 24 CFR 5.703 (Uniform Physical Condition Standards).

> Capital Needs Assessment --For multifamily rental housing projects of 26 units or more, a capital needs assessment will be required to determine all work that will be performed in the rehabilitation of the housing and the long-term physical needs of the project.

> Major Systems - Must estimate (based on age and condition) the remaining useful life of these systems, upon completion of each major system. Major Systems are: structural support; roofing; cladding and weatherproofing (e.g., windows, doors, siding, gutters); plumbing electrical; heating, ventilation, and air condition.

> Lead-based paint - Housing must meet the lead-based paint requirements at 24 CFR part 35.

> Accessibility requirements - Housing must meet, as applicable, in accordance with Section 504 of the Rehabilitation Act, the Americans with Disabilities Act and the Fair Housing Act.

> Disaster Mitigation -- Housing must be constructed to mitigate the impact of potential disasters in accordance with State, local codes, ordinances or other requirements as HUD may establish (where applicable).

> State and local codes, ordinances, and zoning requirements - Housing must meet all applicable State, local codes, ordinances, and requirements or in absence of a State or local building code, the International Existing Building Code of the International Code Council.

International Energy Conservation Code

* All new construction work must also conform to the International Energy Conservation Code (IECC) and applicable state or local energy conservation codes.

* Additionally, ADFA requires that all new building construction complies with the Arkansas Energy Code. ADFA HOME program Recipients must document compliance using the Certificate of Compliance for the Current Arkansas Energy Code.

Section 504 and Fair Housing

* Section 504 and Fair Housing rules impact the design of your project by setting standards for the appropriate number and characteristics of accessible units in your project. The applicability of these standards depends on the size and type of project.

* Additionally, ADFA requires that all developments comply with its Universal Design Criteria.

> Universal Design Criteria that are applicable to both Multi-Family and Single-Family developments:

OTHER FEDERAL REQUIREMENTS

* While the HOME Program has its own regulations, there are additional cross-cutting federal requirements that must be identified and complied with at the appropriate point in project management.

* For the details on these other Federal requirements as they relate to construction management, see Exhibit 11-2 and 11-3 on the following pages.

> Exhibit 11-2 presents guidance on the impact of these additional requirements on the HOME project; and

> Exhibit 11-3 describes how a Recipient can demonstrate compliance with applicable requirements.

In addition to the requirements related to property standards discussed in Part I above, the ADFA HOME program has requirements that relate to the following aspects of the construction process itself:

* Inspection protocols;

* Screening contractors;

* Construction Scheduling;

* Pre-construction conferences: who is included, what is covered;

* Processing and tracking payments;

* Change order management and payment processes; and

* Monitoring reports from partner organizations

The sections in this part offer further guidance on addressing ADFA's requirements. This section will also include a discussion on common construction problems and solutions.

INSPECTIONS AND SPECIFICATIONS

The inspections summarized in Exhibit 11-4 and described in detail below ensure that all work is being completed on time and within stated quality guidelines.

* Initial inspections: Initial inspections establish scope of work and must be allotted sufficient time for interviewing the owner or others, delving into the properties functional characteristics, and to develop thorough, articulate scopes specific to the job inspected.

> The specifications must include detailed drawings and reference material as needed to fully explain all aspects of the scope, especially special conditions requiring unusual steps in the repair.

* Final approval of plans and specifications: ADFA requires that plans and specifications are submitted for final review and approval. The following must be addressed prior to approval:

> The final plans and specifications must be consistent with the scope of work defined in the Recipient's agreement with ADFA.

^ Note that advertisements for construction contract bids may not be published until plans and specifications for such contract have been unconditionally approved by ADFA.

> Final construction cost estimates, including deductive alternatives, must be provided. Estimates for line item bids must include estimated quantities, unit costs and total costs.

* Progress inspections: Progress inspections are crucial to construction management for various reasons:

> HUD requires that inspections be documented and include the signature of the inspector and the date.

> An inspection will determine if work completed corresponds to the work write-up, the construction contract, and the schedule before payment is made to the contractor;

> It may address a need for a change order and intervene in owner/contractor disputes in a rehabilitation project;

> It ensures that safety and security measures are being taken and that all necessary code inspections have occurred;

> It allows the inspector to view the project at key construction points.

* Timing of inspections: The construction schedule will determine the expected times for progress inspections.

> Key points in the construction process would include inspections by qualified persons before work is concealed to determine that it is satisfactory and meets the work specifications and contract.

^ An inspection should occur when reinforcing bars are installed, wiring, plumbing, and insulation are in place.

> An unscheduled inspection may reveal a great deal about work quality and progress, as well as answer concerns a property owner may have.

> It may be necessary when a dispute arises between the parties involved.

* 10-Month review inspection: A 10-month review inspection is not required, but is a good way to assess the quality and durability of the contractor's work and the satisfaction of the homeowner or feasibility of the rental project prior to the warranty expiration and prior to the end of the open window on serving again with HOME funds.

* Final inspection: A final inspection must be made by the appropriate professional and work must pass this inspection before the retainage is released to the contractor.

> Logistics: Upon substantial completion of the project, the Recipient (i.e., city, county, nonprofit, or owner) must inform ADFA that a final inspection is requested.

^ The Recipient will schedule a final inspection to be attended by the owner, project administrator/consultant, contractor(s) and ADFA Inspector.

^ Notice of this inspection must be scheduled with ADFA at least 3-5 days prior to the scheduled date.

^ The final inspection shall consist of a field inspection to confirm that the project has been completed.

^ The following documents must be available at the final inspection:

. Punch List(s);

. Certificate(s) of Final Inspection; and

. Release of Lien Form for each contractor ^ General items of discussion at the final inspection include

. Acceptance of work by all parties;

. Transfer of insurance coverage to the owner;

. Utility considerations;

. Establishment of warranty period; and

. Final payment (Disbursed by ADFA 30 days from a successfully completed Final Inspection.)

* Punch list and close out: Although a few punch list items may be pending at the time of the final inspection, all major problems should be resolved and a Certificate of Final Inspection should be issued at this time.

^ ADFA requires that the Recipient's project inspector and architect, if applicable, conduct a pre-final inspection to ensure that a comprehensive punch list is developed and that the project will be substantially complete at the time of ADFA's Final Inspection.

^ A schedule for completing these items should be negotiated with the contractor, and a corresponding percentage of the cost, plus retainage, should be held back until the punch list items are completed.

^ If an architect was used, he or she will issue a notice of substantial completion. This notice verifies that the structure may be used for its intended purpose.

. The notice of substantial completion may be issued either before or after punch list items are completed, depending on the situation and the extent of remaining items. In all cases, the Certificate of Final Inspection must be signed by ADFA prior to release of final retainage payment.

^ Even when an architect signs off on work, the Recipient must do its own inspection to verify that work is complete and complies with programmatic and other federal requirements.

. The final inspection must be performed by ADFA staff.

> After completion of the punch list items, and (if appropriate) the architect's notice, the Recipient should see that the contractor provides:

^ Cost certifications;

^ Warranties of work performed;

^ Operations manuals (for furnaces and other systems);

^ Guarantees from manufacturers of materials and systems installed; and

^ Release of liens by suppliers, all subcontractors, and the general contractor.

> No final payment should be made until all documents are received and lien releases are verified.

> An IDIS completion report must be submitted to ADFA to close out the project.

* Warranty inspection: A one-year warranty period must be instituted for each contract completed to ensure that the workmanship and materials of the contractor(s) and subcontractor(s) have been sufficient.

> A final warranty inspection must be conducted by the Recipient and/or ADFA staff eleven months after the initiation of the warranty period to finalize any adjustments needed to correct covered deficiencies.

> Any such deficiencies shall be noted by the Recipient or architect, if applicable, and provided to the contractor in writing and corrected.

SCREENING CONTRACTORS: BIDDING AND CONTRACT AWARD PROCESS

Recipients are expected to use applications, bidding documents, agreements, and pre-bid/pre-construction conferences for screening contractors. In general, performance standards and consequences to meet them must be part of every construction program and must be covered in sufficient detail in bidding documents and the pre-construction conference.

* ADFA specific requirements for the bidding and contract award process are detailed below:

* Advertisements for construction contract bids. State law (A.C.A. § 22-9-203 ) and ADFA policy requires publication of advertisement for bids in a newspaper of statewide circulation one time in at least one newspaper of greatest general circulation in the state (i.e., Arkansas Democrat-Gazette) or posting by electronic media. (See the Sample Bid Package for ADFA funded projects, Attachment 1A, Advertisement for Bids.).

^ The date of publication of the notice shall not be less than five (5) days nor more than 30 days before the date established for the receipt of bids.

^ Also, Recipients are required to notify the Small and Minority Business Division of the Arkansas Economic Development Commission of such advertisement.

^ In addition to statewide newspaper advertisement, Recipients may directly solicit prospective bidders and advertise in local newspapers or construction industry trade journals.

^ Note that advertisements may not be published until plans and specifications for such contract have been unconditionally approved by applicable agencies.

^ Additionally, wage determinations, if applicable, must be included as part of the contract documents for the project. Recipients are required to contact ADFA 10 days prior to the bid opening date.

> Interpretations of plans and specifications. All questions regarding interpretation of the plans, specifications, drawings and other contract documents should be addressed only to the design architect.

^ Questions specific to the content of the Sample Bid Package for ADFA funded projects should also be addressed to the representative of the Recipient (i.e., consultant, community development director, executive director, owner, or project architect) who may request further interpretation from ADFA HOME Department staff.

^ Any inquiry or other action requiring written interpretation or instruction from the architect that will modify the plans and specifications and affect bidders (e.g., modified wage determination, redesigns, etc.) must be done so by addendum.

^ An addendum is written instruction issued prior to the opening of construction bids that modifies or interprets contract documents, drawings and specifications by additions, deletions, clarifications or corrections. All addenda must be approved by ADFA prior to issuance.

^ Addenda must be issued by certified mail at least five days prior to the date of bid opening. Failure to attain approval may result in disallowance of affected costs.

> Receipt of all sealed bids should be documented by date and time of receipt and the name of the submitting contractor. Bids received after the established deadline shall not be accepted.

^ All bids shall be opened and read aloud by the Recipient at the time, date and location specified in the bid advertisement. The Recipient shall identify/verify:

. The name and address of the contractor;

. Inclusion of a bid bond, if applicable;

. Inclusion of any other required bid information (e.g., identification of subcontractors); and

. Receipt of all addenda (if any); and the base bid amount minus deductive alternatives which must be listed in numerical order.

^ All of this information must be recorded on the Bid Tabulation Sheet or on a form of equal substance.

> Bids in excess of project budget. If the lowest base bid exceeds the amount of funds appropriated for project budget, then the application of deductive alternatives in numerical order will commence until the bid is within the appropriated amount.

^ If the bid amount after applying all deductive alternatives exceeds the project budget by less than 25 percent, then the contract amount can be negotiated with the apparent low bidder until the amount is within the appropriated amount, provided the unit(s) will continue to meet state and local building codes.

^ If, after the application of deductive alternatives, the amount exceeds the project budget more than 25 percent, then the project must be rebid after revising the plans and specifications. If the contract(s) is within the project budget, then the apparent low bidder(s) can be identified.

> Apparent low bidder. Once the apparent low bidder is identified, the Recipient must determine if he/she is responsible.

^ At a minimum, the following items must be confirmed:

. Is the contractor licensed in Arkansas?

. Based upon past experience, is the prime contractor competent to perform the required work? Specific questions might include the following:

. Has the contractor had any bonds called in the last five years?

. What is his/her record of completing projects on time?

. What is his/her history of payment to subcontractors and suppliers?

. Does he/she maintain a permanent place of business?

. Are his/her equipment and resources adequate to do this project?

. What is his/her technical experience in this type of work?

. Is the prime contractor debarred or suspended from federally funded contracts and thus ineligible to be awarded the contract? To determine this, submit a Verification of Contractor Eligibility Form to your ADFA HOME Program Specialist. All prime contractors are responsible for ensuring that the subcontractors they employ are not debarred or suspended.

. Other criteria may be established by the Recipient as necessary.

^ If a bidder is determined to be non-responsible, the Recipient must document reasons for such decision in writing and proceed to evaluate the next apparent lowest bidder(s) until an acceptable bidder is determined.

> Notification of bid award. Once the apparent lowest responsive, responsible bidder(s) for each contract(s) is determined, the Recipient can notify all bidders whether or not they were successful.

^ Successful bidders must be notified of acceptance of their bid within the time frame specified in the contract documents.

^ Such notification shall be made through issuance of a Notice of Award which requests the contractor to provide acceptable payment and performance bond(s) and certificates of insurance within 10 calendar days.

^ Upon reception of these documents, the Recipient must determine if:

. The contractor has sufficient bonding and insurance. The insured amounts must be consistent with requirements of state law as specified in the contract documents, e.g., 100 percent payment and 100 percent performance bond(s) coverage and sufficient liability coverage amounts.

. Note: Licensing and underwriting limitations of insurance companies in the state of Arkansas can be checked by referencing U.S. Department of the Treasury, Circular 570 Companies Holding Certificates of Authority as Acceptable Sureties on Federal Bonds and as Acceptable Reinsuring Companies as updated in the Federal Register.

^ Contracts must be awarded within the time frame specified in the contract documents.

. If the contract has not been awarded within 90 days of bid opening, the Recipient must notify the ADFA HOME Department to determine if the wage determination (if applicable) is still valid. Any applicable modified or superseded wage determinations will apply to the project.

. Note: Wage determinations applicable on projects with 12 or more HOME-assisted units.

> Post award requirements. After all contract documents have been executed and sufficient bonding and insurance is confirmed, a fully executed set of contract documents must be submitted to the ADFA.

^ Occasionally, bid protests may arise regarding identification of the lowest responsible, responsive bidder. Should a bid protest arise, contact ADFA.

PRE-CONSTRUCTION CONFERENCES

A pre-construction conference can be valuable in providing direction to the parties involved and prevent potential misunderstandings.

* ADFA has the following expectations for all pre-bid meetings:

> The architect or a representative of the HOME program Recipient shall coordinate scheduling the preconstruction conference with all applicable parties.

> At a minimum, 10 days notice shall be given to ADFA and the following persons who must attend the preconstruction conference:

^ Jurisdiction representative, if applicable

. A preconstruction conference should not be held without the city or county representative present if a city or county is the HOME Recipient.

^ Recipient staff (project administrator/construction manager, or consultant);

^ Executive Director of nonprofit entity, if applicable;

^ Developer/Owner, if different from ADFA HOME Recipient;

^ Prime Contractors;

^ If applicable, the architect (especially the person representing the firm and the resident observer);

^ Representatives of the ADFA and all other funding agencies; and

^ Subcontractors (if known at this time)

> The preconstruction conference shall be conducted in accordance with the Preconstruction Conference Agenda and Report.

^ Signed copies of the report, with an attached attendance list, must be distributed to each of the parties identified above within five calendar days of the conference.

> Location of the conference:

^ If it is suitable, the conference should be held at the property where rehabilitation/construction will occur. The property owner should be included.

Working with Contractors

Attracting and keeping high-quality contractors is a key to successful construction management.

One key to successful construction management is having a qualified person in charge of the work who understands the business and the constraints faced by those in the building trades.

Recipients should clearly inform contractors about work expectations, program requirements as they impact the project, about the payment process, and seek their feedback

after project completion.

^ If the project involves new construction, or the existing property is not suitable for a meeting, the conference can be held at the Recipient's offices.

* The timing of a pre-construction conference is after:

> Environmental Review and Release of Funds (ROF) have been completed, and

> Relocation notices have been sent, if applicable.

* The purposes of a pre-construction conference are to:

> Communicate the goals of the project to all team members to ensure everyone is clear on his or her role and responsibilities;

> Identify deadlines and critical phases of the work;

> Review the scope of work and schedule to prevent future problems;

> Explain basic operating procedures, including reports, meetings and other communications required and expected during construction;

> Review applicable programmatic and federal requirements, such as Davis-Bacon, labor standards, and Lead Safe Housing Rules;

> Review procedures for:

^ Inspections - when they must occur and who initiates them;

^ Payment requests - when they should be submitted, who receives them, what they must include, when payment will be made if satisfactory;

^ Change orders - the process for requesting one; what would/ would not be considered in weighing the request;

^ Lien releases - the process and who is involved;

^ Monitoring of progress and reporting;

^ Dispute resolution; and

^ Closing out the project.

> Review the construction contract and ensure all parties have read, understood, and signed it;

> Confirm that subcontractors' names, addresses, and phone numbers are accurately listed;

> For occupied structures:

^ Discuss the handling of service shut-offs and restricting access to bathrooms, kitchens, etc. during lead-paint work as well as other relevant rehabilitation work;

^ Define moving and relocation roles and schedules; and

^ Review/discuss safety and security measures during construction.

* At the conclusion of the pre-construction conference and after the contractor has executed the construction contract, ADFA will issue a notice to proceed with work.

* Construction should commence no later than 10 days after receipt of this Notice.

CONSTRUCTION SCHEDULE

* The person who sets the construction schedule (typically, a Construction or Rehabilitation Manager) must have access to many information sources and have an understanding of construction methods, trades involved, and the sequence of tasks that must occur;

* Construction scheduling requires a knowledge of:

> The building materials required for the project, ordering and delivery methods and protocols;

> The various applicable building codes and standards. The manager must anticipate the key points at which an inspection are required;

> How weather variations can impact construction progress;

> Each development team member's roles and responsibilities; and

> The development budget:

^ What costs can be paid from each source:

^ When funds are available; and

^ How to request payment (including the form that will be used to request payments and the documentation to be provided.)

Timeliness and the Construction Schedule

In construction projects, delays not only increase costs - they may create timeliness issues for the Recipient that have a negative impact on performance.

If construction will not start within twelve months from the date of property or land acquisition, the Recipient must have an adequate explanation; if funds will not be expended within the required five years of the allocation, a Recipient may also encounter timeliness issues with HUD. A construction schedule must be realistic - and enforceable.

A good construction schedule will delineate: how much time the project will take to complete; when inspections are required; when the contractor may make payment requests; and the tasks for each contractor and subcontractor.

* The Construction or Rehabilitation Manager should document each step in the process and list them sequentially, recognizing that some steps must occur simultaneously;

* Develop diagrams to visualize the construction schedule, such as:

> "To do" lists with milestones;

> Flow charts; or

> Critical path method diagrams.

^ The purpose of diagramming is to coordinate the tasks required, reveal their interrelationships, decide which tasks are critical to timely completion, and promote efficiency.

> If a project is behind schedule, the Recipient may attempt one of the following options:

^ Eliminate or redesign the critical path activities (which may reduce the scope of the project);

^ Rearrange critical path activities so that some are performed simultaneously; or

^ Reduce the duration of critical activities (if the critical path is shortened, other activity paths through the network may become critical.)

> If none of these options can be accomplished, the project completion date must be adjusted; this will most likely have cost or timeliness ramifications and is highly undesirable.

* Failure to comply with timelines in the construction schedule may cause severe consequences to the project:

> Costs can increase, causing the project budget to be inadequate;

> Workers and materials may not be available as needed; and

> Housing units will not be ready for occupancy as anticipated.

* To ensure that timelines are met, or that there is ample recourse to pursue if they are not, schedules must be enforceable, the following recommendations can be critical:

> Reference the schedule in the written agreement between the developer and the PJ;

> Reference the schedule in the contract with the general contractor and all subcontracts;

> Reference it in the architect's contract.

* Cover the schedule and stress its importance during the pre-construction conference.

CHANGE ORDERS

* Any changes to construction documents must follow an explicit system for review and approval. Contractors must submit change orders when there is:

> A change to the project design or work specification;

> An alteration, addition, or deletion to the approved scope of work;

> An addition or change to the work schedule; or

> A change in cost for any reason.

* Change orders must be written and address its completeness and appropriateness and its effect on budget, timeframe.

> ADFA requires that a Written Change Order is submitted any time that contract documents are changed, including additions, deletions, modifications, and time-extensions after bid opening.

> Also, all change orders must be reviewed and approved by ADFA prior to issuance.

* An effective system for managing construction will attempt to limit the need for change orders by careful planning, thorough preparation of the work specifications, and review by all relevant parties prior to construction.

* Recipients should anticipate the need for change orders and use them to document alterations as well as to keeping the project moving ahead to successful completion.

> The better the work is planned up-front, the less the need will arise for change orders later.

> However, a contractor may suggest a more cost-effective solution than the architect or rehabilitation staff had planned.

> Even changes that have no cost implications (or reductions in costs) require a change order.

* Change orders will be evaluated for their impact on the project cost, schedule, and scope of work before they are approved by ADFA.

Limiting Change Orders

* A few ways to limit the number of change orders include:

> Require unit pricing in bids so that if a particular item is expanded, the pricing is already determined.

> Request bid alternates in specifications for those items that might be needed, but the Recipient or owner is not sure prior to bid.

> Establish monetary or percentage-of-line-item limits requiring review.

> Reserve the option to pay no profit or overhead on change orders; require cost certification, thus limiting the contractor's incentive to pursue unnecessary orders. [Note that this is risky, as contractors may avoid informing you of needed changes. It requires skilled inspectors and a rigorous inspection protocol.]

> "Red Flag" any project, contractor, or inspector with excessive change orders. Investigate, watching for abnormal correlations. Misleading bids are the primary source of improper change orders. Collusion with inspectors or owners is next.

> Make the lack of change orders that are attributable to poor specifications a performance measure for specification writers.

MANAGING CONTRACTORS

* An appropriate level of action must be taken when work is behind schedule or when the quality of work is inadequate.

> The first level of action is to identify the problem and, if possible, allow the contractor to take remedial action.

* For new or inexperienced contractors, a moderate action to take would be to put them on probation and require them to limit the number of jobs underway at one time, and retain a higher level on progress payments.

> In this instance, the contractor must be fully informed how to remove the probationary status. For example:

^ Completing a number of tasks within the work schedule successfully;

^ Completing training that is relevant to the problem; or

^ Training workers (if they are causing the problem) to improve performance.

> If the contractor is experienced or if work continues to be a problem, the Construction/Rehabilitation Manager must alert ADFA to the issues.

^ For more experienced contractors that continue to have work quality problems, repeated contract violations, and/or fail to perform warranty work, a higher level of remedial action may be appropriate:

^ Sanctions include suspending the contractor and all payments.

> Methods for removing sanctions and probationary status could include:

^ Posting a higher performance bond;

^ Terminating employment of problem workers;

^ Completing training that is relevant to the problem;

^ Completing warranty work; or

^ Reimbursing the program for completion of the work.

> Permanent debarment is the most serious sanction that a Recipient and ADFA can impose on a contractor. It excludes the company from consideration on all program projects and puts their reputation into question for other customers.

* If a contractor continues to be a problem, the Construction/Rehabilitation Manager must involve ADFA in any decision to suspend work, to terminate the contract, or to place the contractor on probation or debarment.

MANAGING PAYMENTS

* The Recipient's system for processing construction payments should be part of the program's written policies and procedures, reviewed by:

> The property owner and contractor prior to signing a rehabilitation contract;

> The developer and contractor for smaller, uncomplicated new construction projects at the pre-construction conference; or

> The entire development team for larger new construction projects at the pre-construction conference.

* Retainage: For all projects, a portion of all payments should be retained (often 10% - 15%) until 30 days after completion of the work or satisfactory completion of the final punch list items.

> The draw schedule is usually included in the overall construction schedule. It establishes clear expectations for all parties when the contractor may request and can expect payments.

> The Recipient should retain a percent of the payment to ensure that the contractor completes the work according to the contract and any latent construction defects have been addressed.

* Payment requests: For housing rehabilitation projects, the general contractor usually submits payment requests to the property owner or the Recipient's Rehabilitation Manager at the completion of each stage of the schedule. The owner should sign off on the request before the Recipient processes it.

> For new construction projects, the developer assembles the draw requests for both hard and soft costs from the general contractor and other professionals involved in the project. The invoice should include:

^ Total budget obligated;

^ Amount of previous payments received to date;

^ Cost for materials stored;

^ Costs incurred during the particular pay period;

^ Total costs incurred to date (includes previous and current expenses);

^ Percentage of work completed to date:

^ Remaining budget; and

^ Amount of payment retained until project completion.

* No payment should be made when there have been changes to the original contract or scope of work without approval of a relevant change order.

* Payment request documentation and review: Each payment request should be logged in as soon as it is received and recorded as soon as it is released.

> Recipients must have a procedure that includes:

^ Who reviews payment requests and approves them;

^ The documentation that must accompany a payment request, including:

. For all projects, an inspection report that supports satisfactory completion of work according to the work write-up, specifications, and/or construction schedule;

. Lien waivers as appropriate;

. If needed, approved change orders;

. For projects subject to Davis-Bacon requirements, signed certifications that demonstrate compliance.

> Once a payment request has been approved by the Recipient, it should be paid promptly in accordance with the agreed-upon schedule.

^ Payment delays often discourage contractors from participating in public programs and if payment is delayed according to the construction schedule (through no fault of the contractor), the contractor is allowed to stop work.

* Final payment and release of retainage: Final payment, less any liquidated damages shall be made to the contractor after:

> Final inspection is completed;

> A Certificate of Final Inspection is signed;

> Certificate of Plumbing, Certificate of Electrical, Certificate of HVAC are signed;

> Release of Liens are received, if applicable;

> All punch list items are resolved; and

> Final payrolls and equal employment opportunity data are accepted by the Recipient, if applicable.

* Contingency funding: Contingency funds are those funds set aside for a project for which there is no known specific use at the beginning. Most projects - especially rehabilitation-involve unforeseen problems that will require funds. This is a way to assure the funds are available if needed. These funds may not be drawn or expended unless an appropriate written change order is executed.

> Funding must be established at the beginning or project for unforeseen circumstances.

> Set up is allowed but only work performed and documented through written change orders is paid.

> Typical amounts vary depending on size and complexity of job.

> Rehabilitation projects should always have a contingency planned.

PERIODIC PARTNER REPORTING

* During the construction period, the Recipient's manager should receive periodic status reports from partners such as contractors, private developers, and property owners.

* There are five key elements of reporting systems:

> Purpose: A reporting system should assist the Recipient to track progress of meeting larger program goals, as well as tracking progress for individual projects.

^ The Recipient should work with other financial partners to develop a reporting system that would respond to everyone's ongoing concerns to eliminate duplication of effort.

> People and partners: The quality of reporting systems is as good as the training and motivation of the people and partners who maintain and use them.

> Process: HOME Recipients must determine:

^ What needs to be measured (e.g., milestones in the construction process, the draws against the contract);

^ When it needs to be measured (e.g., the critical points in a housing rehabilitation or development project); and

^ Who will measure it (e.g., which entity will be responsible for producing the report and who will review it for the Recipient).

> Software or template and hardware needed: Recipients must determine what software or reporting template they currently use or what the need to provide the information they need to adequately track performance;

^ Software or template must be easy to learn and maintain;

^ There must be local technical support available; and

^ It must be easily integrated into other software the PJ is using.

^ Recipients may be limited with their software selection by the realities of their current electronic system and budget constraints to upgrade or change equipment.

> Commitment: Buying new software or hardware does not guarantee an effective reporting system.

^ A reporting system is an investment in capacity (how much work can a Recipient expect from its partners and its own staff), in productivity (how efficiently the system will provide the necessary information to Recipients,) and in team building (how well the Recipients and its partners can work together.)

* The center of performance tracking is the submission of regular progress reports, however, the following principles will ensure reports are useful to Recipients and their partners in developing affordable housing:

> Information requested must be important and useful. Recipients should not request information if its use cannot be explained. The essential information should be data for:

^ Performance milestones in the construction schedule or written agreement; or

^ Required for IDIS or the CAPER reporting.

> Provide clear, detailed report forms and instructions to those responsible for initiating the report.

* Take immediate action if reports are late, inaccurate, or incomplete. If no one is tracking the receipt and implications of reports, partners will assume they are not important and the quality and timeliness of reports will deteriorate.

* Use the reported data fully. If reports are well-designed, they can serve multiple purposes. Inform partners that the information provided in reports is useful in:

> Preparing reports for ADFA;

> Identifying performance and timeliness issues early;

> Planning on-site monitoring visits;

> Making future funding decisions; and

> Developing descriptions of projects for elected officials and citizens.

* There are various ways to use progress reports:

> Milestone tracking: Milestones can come from the construction schedule or written agreement.

^ Recipients can measure progress using these to track progress in individual projects; or

^ Compare progress in similar projects to identify slower performers and take further action.

> Financial tracking: Recipients can examine funding requests to evaluate the fiscal aspects of performance against the construction schedule or written agreement.

> Exception reports: Reports can identify any missed milestones and which projects have put the Recipient at risk of failing to meet timeliness requirements in the HOME program.

* Exhibit 11-5, Progress Reporting Example lists the various project stages and details that can be tracked as part of homeowner occupied rehabilitation projects.

COMMON CONSTRUCTION PROBLEMS AND SOLUTIONS

* It is unrealistic to think that problems will not be encountered during construction and that issues can always be eliminated through better communication or reasonable controls. Since problems will arise, policies and procedures for dealing with them must be articulated. In all cases, the goal is a quick and inexpensive resolution.

* Recognizing problems early - Typical warning signs include:

> Job site tension and conflict. A high number of on-site disputes between contractors and property owners or contractors and their employees may indicate that there is a potential conflict which could delay construction. These disputes may seem minor at the time, but they may be part of a larger problem that should be addressed as soon as possible.

> Lack of contractor communication about problems and potential claims. A

contractor's reluctance to correspond with the property owner or program manager points to a potential problem. A lack of correspondence on the part of the contractor may indicate a lack of interest in the overall project.

> Excessive requests for additional information. A property owner frequently requesting additional information from the contractor can be an indication of a problem. Constant requests for additional information may indicate that the property owner does not think that the contractor is reliable and is doing the work according to codes and standards, and specifications.

* Common problems that Recipient managers should watch out for include:

> Cost overruns;

> Unsatisfactory workmanship;

> Excessive change orders;

> Delays; and

> Theft from the site.

* Maintaining good relations with contractors. The following are recommended to proactively manage contractors:

> Attract good contractors and maintain their active participation in projects.

> Ensure that property owners or developers understand their roles and responsibilities in choosing a contractor, and in facilitating and monitoring the construction process.

> Make special efforts to keep property owners and contractors informed about program changes and involve them in project design decisions.

> Clearly articulate eligibility and workmanship requirements and apply these fairly. Contractors must be confident that the agency will make timely payments for completed work that meets the program standards.

> Seek feedback from contractors and property owners through periodic meetings and debriefings after project completion. In particular, property owners and contractors should be encouraged to discuss any problems they are having with program requirements or processes.

Given the number and complexity of the requirements related to construction covered under Parts I and II of this chapter, ADFA expects Recipients will develop a process for managing construction. In this section, ADFA recommends specific features for a successful management process, highlights the basic management tasks that must be performed, and provides guidance on how to approach the level of staff involvement in managing construction.

FEATURES OF A SUCCESSFUL MANAGEMENT PROCESS

With respect to developing processes that manage construction activities and result in successful projects, ADFA encourages Recipients to develop processes that:

* Recognize the value of construction management: The primary purpose for construction management is to ensure that agreed to plans are carried out and that all the rules and requirements are followed and documented. Good construction management will save time and money, as well as ensure quality. Many different parties play a role in construction management, including the developer, the construction manager, the general contractor, the supervising architect, and the Recipient's project manager and inspectors.

* Chose the appropriate level of involvement for Recipient staff on a particular project: There are three general levels of Recipient involvement: intensive, moderate, and minimal. Selecting the appropriate level depends on the Recipient's staff capacity and the size and nature of the project. Recipients must employ an appropriate level of involvement to ensure protection of the public investment, while at the same time being sure that staff time spent makes a positive contribution to the project outcome.

* Take the right steps to get a project off to a good start: The project should start with a pre-construction meeting between all of the parties involved in the project to clarify roles, expectations, scheduling, and requirements. Depending on the nature of the project, the parties may include the property owner, construction manager, grantee, developer, and architect, among others.

* Establish the best way to measure progress on a project: A key tool in measuring progress is the construction schedule, and a key action is conducting inspections throughout construction. Several scheduling formats can be used, bar charts, logic networks, and critical path charts. Initial, progress, and final inspections should be conducted for every project.

* Manage the change order process: Change orders are used to authorize and record changes to construction work that may affect cost, time schedule, or the scope of the project. Recipients should have a change order system in place that allows staff to check each change order requested by contractors

* Execute the appropriate steps for construction draw payments: The general contractor usually submits a request for payment, which triggers an inspection to verify that it is appropriate to make the requested payment. The request for payment should include sufficient backup source documentation such as invoices, proof of code inspection, and proof of inspection by the supervising architect. Recipients must review the request and backup documents and make a site visit before approving the request for payment. The method for processing payments should be set forth in the program's written policies and procedures, and covered in detail at the pre-construction conference.

* Establish process for resolving disputes: Recipients should have a process in place for resolving disputes quickly and cheaply but also fairly. The first approach for resolving disputes is for the Recipient construction management staff to try to reach an agreement between disputing parties. The next stage of resolution may involve professional mediation by ADFA staff or arbitration services. The last resort for programs, property owners, and contractors should be legal action.

* Make use of the appropriate enforcement mechanisms to protect the program:

Probation, suspension of payments, suspension of work, and debarment, unfortunately, must be part of every contracting program in order to enforce performance standards. Fairness, consistency, and clarity are critical factors in successful enforcement. Behaviors that result in sanctions, the nature of the sanctions, and remedies to restore good standing should be clearly described to the contractors.

* Manage risk: Recipients must establish policies and procedures to manage risk in order to protect their investments and those of the property owners. The commitment of political leaders the chief elected officials, agency directors, and owners to enforcing the policies and standards for contractors is essential to making a program work. Bonding, letters of credit, and insurance are three tools used to manage risk

BASIC MANAGEMENT TASKS

The process put in place by Recipients must ensure that basic management tasks are ably performed. The basic tasks include monitoring of:

* Progress. ADFA makes periodic inspections to evaluate construction progress. Inspections are a necessary aspect of construction oversight because they ensure that all work is being completed on time, within stated quality guidelines, and is in compliance with all State and local codes and Federal program rules. The Recipient must ensure that ADFA is notified when construction reaches the appropriate stages so that ADFA staff can visit the property and make the necessary inspections.

* Schedule. Understanding when tasks are scheduled to occur and monitoring against that schedule ensures that the Recipient knows that:

> Work is progressing as planned;

> Trades workers scheduled to be on site is working;

> Resources are available for the project, based on scheduled draws;

> Due date for absolute project completion is set; and

> Appropriate inspections are done at key points in the process to ensure code and standards compliance.

* Quality. The ADFA HOME Program property standards described in Part I must be adhered to during construction, including materials used and the methods of installation.

> A well-written construction contract that provides the owner or developer the authority to demand the contractor's adherence to the prescribed property standards.

> ADFA uses its written agreement with the owner to require owners to include the necessary language in the construction contract.

* Cost and expenditures. By tracking the budget on a regular basis, a Recipient can ensure that the construction work is completed within budget, and all costs are reasonable, as based on the original budget projections. A Recipient can be alerted to possible cost overruns in a timely fashion so that alternative methods of funding or cost controls can be adopted.

> Recipients should review payment requests from contractors and subcontractors. This process ensures that contractors and subcontractors are receiving appropriate payment for completed work, that they are not being overpaid or compensated for unfinished or incomplete work.

> Recipients should have a formal role in change order requests to the plans and specifications. By reviewing these requests, Recipients will be able to approve appropriate and necessary changes and to reject those that are not. In addition, reviewing all change order requests will enable Recipients to track additional costs to the project's budget.

* People. Is the contractor and architect talking to one another? Does the homeowner know what work is scheduled for a particular time? These questions that can help Recipients assess whether there are problems with the project. Catching a problem before it derails a project can save time and money. Recipients should talk with the owner, general contractor, and subcontractors to assess potential issues that could lead to conflict.

* Reporting. Every project should have written construction monitoring and reporting procedures. The procedures should be referenced in, and attached to the written agreements, loan documents, and the construction contract. The purpose of monitoring is to keep the project team working toward the final deadline within the approved budget.

> Formal monitoring consists of scheduled on-site visits, while informal monitoring may be unscheduled visits to the site, and regular communication with the property owner and contractor.

> Establishing reporting formats in advance can assist to effectively execute project management. Examples include:

^ Requiring progress reports from the architect (monthly, quarterly or with each payment request) that should document any decisions that have been made in the field, including changes to the scope of the work, schedule, and resolutions to problems or disputes.

^ Attending meetings held regarding construction progress (e.g. meetings involving the architect, financial partners, property owner, and contractor). Construction progress meeting discussions will include inspections, change orders, and any problems or disputes that have occurred during construction.

^ Requiring notification before any work is concealed so that it can be inspected. ^ Requiring notification prior to a state or local code inspection.

APPROPRIATE LEVEL OF INVOLVEMENT

Although a Recipient must provide oversight to construction projects, the appropriate level of involvement will vary based on staff size, capacity, the complexity of the project, and the sophistication of the development team.

* The degree of oversight can be influenced by:

> Project size. Rehabilitation of existing housing units may have a less complicated process and only require only informal hands-on oversight. Design-Award-Build model projects with complicated processes, multiple players, numerous stages, and longer timeframes generally require that the Recipient carry out formal oversight procedures.

> Complexity. The complexity and number of construction activities needed for project completion will affect the level of Recipient oversight that is required.

^ Example: A rehabilitation project may require a limited number of trades (e.g. plumbing, electrical) whereas broader construction activities may be needed on a new construction project.

> Contract service providers. Certain professional skills are essential to complete project construction, including those of architects, engineers, construction managers, and general contractors.

^ It may be necessary for the Recipient to look outside its organization to acquire some or all of these skills.

^ If there is a large number of outside service providers involved in project construction, monitoring strategies are usually more complex and formal because there is a greater need for more attention to detail and a clear division of responsibilities.

> Staff expertise. The extent of Recipient staff expertise will influence the construction management approach. Strategies may be less formal if the internal staff expertise is extensive.

* In general, there are three levels of Recipient involvement in construction management as described below. Note that the option selected depends on the factors listed above (project size, complexity, contract service providers and staff expertise on hand).

> Intensive involvement. In this model, the Recipient is extensively involved in the day-to-day construction process.

^ This level of involvement is necessary where:

. There is the potential for disputes;

. The owner is unable to represent him/herself ;

. The contractor or subcontractors are not well-known, or have experienced problems in the past; or

. There are unforeseen conditions.

^ Intensive Recipient involvement requires sufficient and capable staff. It is characterized by the following:

. Recipient staff is frequently on-site during the construction process to conduct inspections, verify compliance with codes, act as the clearinghouse of information, and mitigate disputes.

. Recipient gets regular construction progress and status reports from the architect, project manager, and owner or developer.

. Recipient may initiate and facilitate construction progress meetings with the architect, property owner or developer, contractors and other financial partners to discuss any construction problems, disputes, and change orders.

. Recipient reviews all payment requests and releases payments accordingly.

. Recipient reviews and approves all change order requests.

. Recipient tracks adherence to the budget.

. Recipient attends the closeout inspection to ensure compliance with codes and standards and HOME Program and other Federal requirements are met.

> Moderate involvement. In this model, the Recipient continues to have hands-on involvement in the construction, but delegates more tasks. This level of involvement is typical in homeowner or small unit rehabilitation, where the owner is taking responsibility for day-to-day supervision of the contractor and the ADFA HOME Recipient is a Recipient managing ADFA's homeowner occupied program. It is characterized by the following:

^ Recipient staff attends inspections throughout the construction stage and checks to make sure that the construction manager documents the results of the inspection.

^ Recipient requires the supervising architect or construction manager to submit monthly construction progress and status reports.

^ Recipient staff meets with the architect, the property owner or developer, and other financial partners on a monthly, rather than a bi-weekly or weekly basis, to discuss any construction problems, disputes and change orders.

^ Recipient reviews all payment requests attends all payment inspections, and releases payments accordingly.

^ Recipient reviews change order requests that are above a certain dollar amount set by program guidelines.

^ Recipient tracks adherence to the budget with each requested pay draw.

^ Recipient attends the close-out inspection to ensure compliance with codes and standards and Federal program rules.

> Minimal involvement. A Recipient may choose to contract with construction professionals to do construction oversight. A Recipient should make sure that its representatives know that HOME Program funds are being used, and understand the program requirements that must be monitored. A Recipient's representative must also know all local rules and requirements that apply to the construction job. A monitoring system that relies on outside contractors has the following characteristics:

^ The Recipient relies on a third party to conduct periodic inspections throughout the construction stage and verify compliance with codes and standards and HOME Program and other Federal requirements.

^ Recipient staff requires periodic construction status reports.

^ Recipient meets with architect, local agency, sponsor, and other funding partners on an as-needed basis to discuss any construction problems, disputes, and change orders.

^ Recipient gives authority to a third party to review all payment requests and change orders and to make recommendations to staff about payment.

^ Recipient periodically tracks adherence to the budget.

^ Recipient uses a third party to conduct closeout inspection to ensure compliance.

LIST OF FORMS

ADFA has all construction management forms available on their website, www.arkansas.gov/adfa. These forms include:

* IDIS completion report

* Certificate of Compliance for the current Arkansas Energy Code

* Sample Bid Package, including Attachment 1A, Advertisement for Bids

* Bid Tabulation Sheet

* Preconstruction Conference Agenda and Report

* Notice to Proceed

* Written Change Order

* Punch List(s)

* Certificate(s) of Final Completion

* Final Contractor Estimate(s) (numbered and marked final)

* Release of Lien Form for each contractor

* Verification of Contractor Eligibility