Preface

Note

Summary and Overview

Targeted HOME Program

HOME Rental Rehabilitation Program

Assessing Property Management Capacity

The Role of the Management Agent

Responsibilities of the Management Agent

Design Review

Management Plan

Marketing/ Lease-up

Transition From Construction to Operations

Ongoing Management and Maintenance

Chapter Three

Planning for Long-term Financial Feasibility

The Importance of Underwriting

Setting Initial Rents

Thus, under the circumstances described above, Project A, which has been priced at the maximum allowable program rent from the beginning, would be limited to increases averaging 2.15% per year, significantly below even the rate of change in AMI. The compounding effect of factors as seemingly small as this are dramatic when projected over a fifteen or twenty year period. If the sponsor of Project A had projected rental increases of 2.5% per year, actual increases would fall well short of expectations:

Over a twenty year period, a twenty-five-unit project would fall short of projections of potential rental income by a total of $118,950 given the above assumptions. On the other hand, if Project B operating in the same market at the same time had been able to structure its financing in a way which allowed initial net rents to be set as low as $400 per month, it could have implemented annual increases in rental income at a rate of 2.8% per year without exceeding maximum program rents throughout the entire twenty years given the same assumptions about increases in AMI and utility allowances:

Project B will probably collect less rental income over the life of the project, but the financing was initially structured with lower debt service to accommodate the reduced initial rents. Project B will undoubtedly be better able to keep pace with increases in operating expenses than Project A. This is especially true given that Project A may be even further restricted in its ability to increase rental income by some of the other factors mentioned earlier in this section (e.g. higher vacancy, higher turnover, external market factors, etc.). In this example, Project A is more likely to experience financial difficulties in later years due to a combination of such effects.

The preceding section dramatically illustrates the degree to which relatively small differences in the assumptions used in projecting increases in income and expenses over time can have drastic impacts on long-term project feasibility. Given that it is impossible to predict the future, there are three essential principals to sound project underwriting which are useful in planning for the unknown. The first is to start with realistic assumptions for year one, the second is to err on the conservative side (within reason) when projecting those figures into the future and the third is to structure subsidies in ways which can meet program objectives under a wide variety of future economic conditions.

Obviously, we are not able to predict with any degree of certainty which forces will affect the financial feasibility of any given project, nor do we know the degree to which those forces will impact individual projects. Furthermore, our limited ability to accurately predict future events is greatest when those events are nearest to the present time and weakest when they are in the distant future. Given that we know the most about economic conditions in the first year of any long-term financial projection, we should spend the most time assuring ourselves that the assumptions in the first year are valid.

If, for example, a sponsor budgets operating costs of $2,400 per unit per annum in year one when our experience tells us that similar projects average $2,700, we should definitely analyze this carefully. Nothing is likely to have a greater an impact on long term projections as the accuracy of assumptions in Year One. Even if the sponsor accurately predicted that operating costs would increase by an average of 4.0% per year over the next twenty years, the fact that she inaccurately predicted the actual first year expense would be catastrophic:

On a twenty-five unit project, a miscalculation of this magnitude would cause expenses to exceed projections by a total of $223,325 over a twenty year affordability period. The isolated effect of such a miscalculation could conceivably cause a project to fall well short of its long-term financial projections without sending it into financial ruin. The combined effect of several such miscalculations, however, can cause projects to fail over time.

Given the last statement, it is extremely important to err on the conservative side when projecting increases in rental income and expenses. One way to do this is to always insist on higher rates of inflation on expenses than for income in long range projections. For example, a state could insist that rent increases be projected at no greater than 2.5% per year and expense increases at not less than 4% per year. In fact, experience tells us that this is more likely to reflect reality, especially in the later years of a projects existence. Properties which cannot sustain such conservative projections may be at risk of future financial troubles, especially if initial rents are set too close to program maximums.

It is less important to accurately predict the actual rates of increase than it is to maintain a differential of at least 1.0% to 1.5% between inflation income and expenses (with expenses having the higher rate). While we may not always be able to predict what will happen to negatively affect rosy financial projections, we can be reasonably assured that something will happen over the life of the property to have warranted conservative projections.

That being said, states have a responsibility to avoid over-subsidizing HOME-financed developments and to prevent situations in which project owners receive excessive financial benefits as a result of that subsidy. If a project is structured based on conservative assumptions which do not materialize, that project may be in a position to generate excessive cashflow over time unless steps are taken to guard against that occurrence. The simplest way to control this is to accelerate repayment on the HOME subsidy in years in which debt coverage exceeds some maximum threshold (e.g., 1.25 to 1). Any cash generated in excess of that amount could be applied to principal reduction on the HOME loan/grant. Thus, even in a booming economic environment which can sustain higher than projected increases in income, one or more of the objectives of the HOME program can still be met.

In such a situation, the owner will have a choice of either raising rents at that higher sustainable rate, thus generating program income to be used on other HOME projects, or raising rents at a lower rate than would otherwise be permitted, thus creating a situation in which housing is even more affordable in relation to the local marketplace than before. It is important to incorporate the terms of such an accelerated repayment plan into written loan/grant documents and to provide a mechanism for monitored its application over time.

The establishment and proper use of project reserves is another very important factor in assuring a project's long-term financial health. There are three basic kinds of project reserves:

• Lease-up reserves which cover initial project expenses during the initial months of operation.

• Operating reserves which cover unanticipated operating shortfalls during the life of the project.

• Replacement reserves which cover the costs to replace major appliances and building systems as they wear out during the life of the project.

Projects with inadequate or mismanaged reserves will predictably experience financial stress; such stress usually occurs in later years when operating and maintenance expenses increase at much greater rates than increases in rental income. The appropriate structure and level of each type of reserve varies by location and project type. For instance, a rehabilitation project that does not replace a twelve-year-old roof may require a greater replacement reserve than a newly constructed project whose roof is warranted for twenty years.

Similarly, a project with comfortable cashflow should require lower operating reserves than projects with tighter operating cashflow. States that are attentive to the appropriate structure and level of necessary project reserves should experience fewer economic problems as their loan portfolios mature.

Normally the lease-up reserve is capitalized as part of the project development budget. It is essentially a one-time allowance for the higher-than-normal vacancy usually associated with new projects during their early months. During this period of high vacancy, the lease-up reserve is available to pay debt service, operating costs and leasing expenses which are not covered by the reduced rental income which is collected during this period. The amount of the lease-up reserve varies from project to project depending on the expected amount of time to achieve full occupancy. The Final HOME Rule clarifies that HOME funds may be used to fund the cost of "an initial operating deficit reserve, which is a reserve to meet any shortfall in project income during the period of project rent-up (not to exceed 18 months) and which may only be used to pay project operating expenses, scheduled payments to a replacement reserve, and debt service" [CFR 92.206(d)(5)].

In most cases, a prudent amount for this reserve would be 50% of the gross monthly income assuming full occupancy multiplied by the number of months in the lease-up period. Smaller projects usually achieve full occupancy quicker than larger projects. HOME regulations require that "any HOME funds placed in an operating deficit reserve that remain unexpended after the period of project rentBup may be retained for project reserves if permitted by the participating jurisdiction" [CFR 92.206(d)(5)].

The operating reserve is also usually capitalized as an element of the project development budget. Its purpose is to provide working capital or liquidity over the entire life of the project during unanticipated periods of negative cashflow. If, for example, unpredictable future economic forces create a situation in which rents cannot keep pace with operating expenses, a well-funded operating reserve can help a project meet its economic obligations. A project that does not have adequate reserves may be forced into short-sighted economies such as deferral of necessary maintenance to forestall loan default or public bail-out.

Depending on the level of projected cashflow, three to six months of operating expenses and debt service would be considered a prudent initial operating reserve. However, unless an unexpended portion of a HOME-financed lease-up reserve is allowed to carry over into project reserves as provided in CFR 92.206(d)(5), the long-term operating reserve cannot be financed with HOME funds. Other project sources, such as equity raised from tax credit syndication, will often have to be used to establish the initial balance of this account. States should also consider requiring some portion of project operating cashflow to be retained in the operating reserve (i.e., require ongoing contributions to the initial reserves balance as a priority distribution of cashflow), particularly in cases where the initial reserve balance is lower than desired.

The replacement reserve is usually funded out of the project operations by monthly payments into an escrow account along with debt service, real estate taxes and hazard insurance payments. In the case of a rehabilitation, it may also be prudent to capitalize an initial balance from the project development budget. The purpose of the replacement reserve is to fund predictable capital repairs and equipment replacement as various building systems wear out over the life of the project. Almost by definition, the replacement reserve should build up during the early years of the project with few, if any, withdrawals during that time. As the project ages and systems and equipment require major repair or replacement, the balance may begin to diminish. A well-planned replacement reserve will be able to finance all necessary capital replacements and major repairs during the life of the project. A project which does not have an adequate replacement reserve will not be able to afford needed improvements in the later years without additional private investment or public subsidy.

In addition to requiring adequate project reserves, states should be concerned that the reserves are properly structured to achieve their intended goals. The terms of how each reserve account will be handled should be clearly detailed in writing prior to loan/ grant commitment and should include safeguards against uses of reserves for purposes other than those for which they were established. States will probably wish to monitor reserve accounts and to reserve the right to approve any withdrawals. In many cases, states will wish to actually hold the funds deposited in reserves and act as escrow agent.

One of the most predictable things about future financial conditions is their unpredictability. The recommendations outlined in this chapter do not offer any real insights into predicting the future. However, they do suggest strategies for anticipating the unexpected and being prepared to deal with it when it is encountered.

Following the recommendations in this chapter will generally require higher levels of subsidy per project, either through greater initial investments, softer financing terms, or both. That is, a project cannot set rents at fifty dollars per unit below maximum levels without simultaneously reducing debt service in order to maintain a healthy debt coverage. In most cases, the only way to reduce debt service is to increase subsidies. If states determine that the cost of improving long-term project feasibility is an increase in the level of subsidy provided to each project by 30%, they must ask themselves whether they are willing to pay that price. Would they prefer to have 70 units of financially stable housing that can be reasonably expected to operate without additional subsidy?- or would they prefer to have 100 units of financially unstable housing which may require additional subsidies down the road?

Chapter 4

Monitoring Long-term Compliance

After completion of construction of rental projects, the state must ensure ongoing compliance with federal regulations in the following areas: affordability; housing quality standards; and affirmative marketing.

Long-term Compliance Requirements

The period for which states must comply with federal requirements varies depending on how much HOME funds are invested per unit:

• Projects receiving less than $15,000 per unit must comply for at least five years.

• Projects receiving between $15,000 and $40,000 per unit must comply for at least ten years.

• Projects receiving more than $40,000 per unit must comply for at least fifteen years.

• All projects using HOME funds for new construction or to acquire newly-constructed housing (regardless of the amount of HOME funds used) must meet affordability requirements for at least twenty years

States must hold the recipients HOME funding (i.e., the property owners) responsible for compliance with applicable federal regulations throughout the compliance period. In practice, however, property owners generally delegate responsibility for maintaining affordability, affirmative marketing and housing quality standards to the management agent during that period.

States should therefore take steps to ensure that both owners and management agents are aware of all federal requirements. To ensure such awareness, state should require specific language in the management agreement. This language should outline all requirements and clearly assign responsibility between the parties for ensuring compliance. States should also provide compliance manuals which contain guidance and sample forms to both owners and agents. Both parties should also be encouraged (or required) to attend HOME compliance training geared specifically to these long-term compliance issues (e.g., affordability, housing quality standards and affirmative marketing). This chapter examines Minnesota's HOME Rental Rehabilitation Program to give examples of how a state can establish a program delivery network, develop written agreements and monitor compliance.

Throughout the compliance period described above, all HOME-assisted units must meet HOME affordability guidelines at all times. At minimum, 20% of assisted units must be leased to households with incomes at or below 50% of the Area Median Income (adjusted for household size) at rents that do not exceed the low-HOME rents.

In most states, the remaining 80% of units must be occupied by households whose incomes at the time of initial occupancy do not exceed 60% of AMI at rents which do not exceed high HOME rents. When HOME is used with the Low-Income Housing Tax Credit , in order for HOME funds to be considered in eligible LIHTC basis, at least 40% of all units must be restricted to households at or below 50% AMI at rent not exceeding low HOME rents.

If, upon recertification, a household's income exceeds these limits, that household will not be required to move. To maintain the minimum income and rent targeting, however, the next available vacant unit of similar size in the project must be rented to a household which allow the project to again meet the maximum income requirements. If a HOME-assisted tenant's income exceeds 80% of AMI, the project must charge a gross rent equivalent to 30% of their gross monthly income (unless prohibited by state law, local law, or the Low-Income Housing Tax Credit Program). In most markets such a rent would exceed the market rent for a comparable unit, thus creating incentive for that household to move into non-assisted housing.

Maximum Gross HOME rents are generally based on adjusted Area Median Incomes. Low-HOME rents are the lesser of HUD Fair Market Rents (FMR) or an amount equal to 30% of the income of a household at 50% of AMI (assuming 1.5 persons per bedroom). High-HOME rents are the lesser of FMR or an amount equal to 30% of the income of a household at 65% of AMI (assuming 1.5 persons per bedroom).

The rents described above are gross rents which may need to be adjusted by a utility allowance, depending on the utilities paid by the tenant. Many states specify that HUD Section 8 utility allowances are the minimum acceptable standard to be used in calculating maximum net rents.

Note that states have the right to establish more restrictive income targeting guidelines than those outlined above. For example, many states choose to base High-HOME rents within their jurisdiction on 60% of AMI rather than 65% to make them consistent with the maximum rents under the Low Income Housing Tax Credit program. In such cases, high HOME rents still may not exceed fair market rent. States may also choose to require or encourage more than the minimum 20% of units serving households at or below 50% AMI.

The maximum income and rent guidelines are periodically published by HUD. To ensure enforcement of proper rent limitations, a state should promptly update and distribute a chart summarizing maximum income and rent limits for its various localities. It should then distribute this summary quickly to all property owners and project management agents within the state. HOME funding contracts and all management agreements should explicitly prohibit rents or initial tenant incomes exceeding the most recent chart transmitted by the state.

Given the complexity of the income and rent restrictions outlined above, states should periodically provide specific training on the subject; they should further require owners and managers to attend. States should keep requirements user-friendly by: simplifying (or clarifying) information on income/rent level charts; providing sample forms for adjusting for utility allowances; and providing simple forms for reconciling conflicting program requirements.

Some states provide information to sponsors regarding the federal requirements. To provide some examples, Wisconsin encourages past sponsors to participate in training sessions to provide insights into which mechanisms are most effective to insure compliance and why. Montana provides more detailed guidance concerning affordability at the administration workshops for funded grantees. The grantee must make a determination as to which approach- resale or recapture- it will use in its program and explain the structure of that approach in the management plan (which includes a description of project activities and procedures) that it includes in preliminary form with the application.

According to the Final HOME Rule, "housing that is constructed or rehabilitated with HOME funds must meet all applicable local codes, rehabilitation standards, ordinances, and zoning ordinances at the time of project completion@ [CFR 92.251(a)(1)]. If local standards do not exist, states may choose one of three model codes described in the regulation. If FHA financing is involved, states may rely on a Minimum Property Standards inspection performed by a qualified person for that program.

States must also ensure that rental projects comply with the above housing quality standards throughout the term of affordability. For property managers and owners, adequate documentation can be a checklist that certifies compliance with the applicable quality standards, provided the checklist is completed annually and signed by the management agent for each assisted unit.

The state, however, "must perform on-site inspections of HOME-assisted rental housing to determine compliance with the requirements of 92.251 and to verify the information submitted by owners . . . no less than: every three years for projects containing 1 to 4 units; every two years for projects containing 5 to 25 units; and every year for projects containing 26 or more units" [CFR 92.504(d)(1)]. State inspections must be based on a "sufficient sample of units." Although the regulation does not define "sufficient sample of units," many states consider 15% to 20% as a sufficient sample. States may contract with an independent third party to perform such periodic inspections, but states will be held ultimately accountable by HUD for ensuring that quality standards are maintained on all HOME-assisted projects.

In Minnesota, staff architects assess the scope of rehabilitation for proposed projects to ensure compliance with housing quality standards and the state building code. The architects also verify that the property will meet those standards for at least five years. As part of this verification, the architect assesses whether the HOME funds requested are appropriate in relation to construction and maintenance costs. At the completion of construction, the local administrator inspects the property for compliance with housing quality standards; the inspector then reinspects the property annually for five years. Minnesota requires that a report on inspection results, which include recommendations (and the owner's action on those recommendations), be maintained at the local administrator's office.

HOME requires each state to adopt an affirmative marketing policy that includes specific expectations, requirements, procedures and evaluation criteria. The policy should give clear guidance concerning expected actions and the documentation that a project must maintain. For the duration of the affordability period, rental projects containing five or more HOME-assisted units are expected to take certain actions, as determined by the state's policy, designed to target marketing of vacant units to persons not likely to apply for housing without special outreach.

States have two choices when monitoring the affirmative marketing actions of a project. The state may require that the affirmative marketing documentation maintained by each project be reported annually to the state for assessment or it may review records at periodic onsite inspections. If a state determines that a project's marketing efforts are not effective in meeting outreach goals, the state should outline corrective actions (as provided in the state's affirmative marketing policy).

HOME regulations require states to establish written agreements governing the use of the HOME funds within each project. Written agreements should identify specific areas of compliance with the HOME statute and regulations, including who is responsible for ensuring compliance. Written agreements should also describe the documentation required, monitoring procedures, and who is legally bound by the agreement. A written agreement between a state and a project owner, sponsor or developer of a rental project is essentially a contract governing the use of the HOME funds on that specific project.

Among other things the written agreement should describe the applicable affordability period, specific income and rent targeting requirements, record keeping requirements, applicable property standards, and specific affirmative marketing requirements. Agreements must be clearly and precisely worded so all parties carry out their responsibilities under the HOME program as intended by the state.

For HOME-assisted rental projects, states should create a program file, while the entity directly responsible for HOME projects should create project and tenant files. In these files, states and HOME projects should maintain the following records to document long-term compliance:

The state program file should include:

• All updates to HUD income/rent information (including FMRs);

• Each property's annual report to the state of rents and tenant incomes on HOME-assisted units as required under CFR 92.252(f)(2).

Project files should include:

• Documentation of applicable utility allowances for applicable unit types in that locality, such as from a local Section 8 administrator;

• Calculations of maximum net rents with a space for the monitor to acknowledge that calculations are correct;

• A rent roll showing which units are HOME-assisted.

The rent roll should specify which of these units meet low HOME rents and the effective dates of all unit rents. Prior rent rolls should be preserved.

Tenant files should include:

• The rental application;

• All required initial income verification forms (completed by the entity providing the income);

• Annual recertifications of tenant income; and

• The executed lease, which should list all members of the household, the effective date and term of the lease, the rental payment, and any special clauses relevant to the HOME funding;

• Source documents at six-year intervals verifying the income of individual tenants (for projects with affordability periods longer than 10 years);

The monitoring file should include:

• A checklist certifying that the monitor confirmed on a sufficient sample of files that rents are within program guidelines, that tenant incomes are documented as eligible, that tenant files are consistent with project files (e.g., that rents reported are consistent with cash receipts);

• Checklists from a sufficient sample of files for each applicable monitoring cycle (1, 2, or 3 years as outlined in CFR 92.504(d)(1).

Program files and written agreements should specify which property standard will be applied (i.e. HQS, MPS, etc.).

Project files should include documentation that all units were annually inspected using a checklist and certified to meet the applicable standard.

Monitoring files should include a certification that the individual unit checklists were reviewed and that a representative sample (15% - 20%) of assisted units were inspected by the monitor (including evidence that failed items were corrected within a reasonable time). In the event that several units in the sample "fail" inspection, the monitoring file should note a concern and contain written requirement(s) of remedial action or follow-up actions.

Program files should include the state's affirmative marketing policy. Project files should include evidence that the state's policy was communicated to and acknowledged by the project owner, sponsor or developer (this should occur in the written agreement). Project files should also include whatever information or measures are required of projects by the state's policy.

Monitoring files should include written acknowledgment that project files include all information required by the state's policy and an assessment of whether the activities were effective in meeting the projects outreach goals, including any required corrective actions.

As outlined above, states must conduct site inspections according to the following schedule:

During on-site monitoring, the state or its agent must ensure that: (1) the information reported to the state between monitoring visits is accurate; (2) project and tenant files contain all required information and are properly maintained by the owner or management agent. On-site monitoring also provides the state with an opportunity to provide technical assistance to owners and managers who need to improve compliance and record keeping procedures.

States may delegate monitoring responsibilities to an independent third party via contract. When doing so, a state must: accurately convey monitoring requirements; require regular reports of monitoring activity; and monitor a sufficient sample of the contractors monitoring files to assure adequate quality control.

The costs of long-term compliance monitoring, whether performed by the state or contracted to a third party, must be paid out of the state's maximum 10% administrative budget.

MHFA establishes two written agreements: one between the state and the local administrator, and one between the state and the project owner.

States may establish written agreements as stand alone documents, or may incorporate them into existing project documents, such as the project mortgage or award documents. Further, since the written agreement is established at the time of fund award, a clear progression should be evident from its use governing construction activities to its use governing long-term compliance.

Minnesota: An Example Using a Local Network of Providers

MHFA administers the HOME Rental Rehabilitation Program through a network of housing authorities, CHDO's, and other entities throughout the state. Currently MHFA is working with about 34 local administrators. MHFA periodically sends invitations to local governments inviting them to apply for participation as a local administrator. The application period lasts thirty days; Minnesota makes awards on a first-come, first-served basis until funds are exhausted. The minimum amount of HOME funds that must be put into a project is $7,500; the maximum is $500,000. The minimum amount of HOME funds per unit is $2,250; the maximum is $14,000.

Applications proposing rehabilitation projects are reviewed by HOME staff in MHFA's Multifamily division for site control, match, an initial Housing Quality Standards inspection by the administrator, proposed rehab scope, and construction cost estimate. The state sends approved applicants reservation letters that give applicants 120 days to: obtain commitments for other funding sources, identify a contractor, and resolve any other issues, such as relocation. If issues are not resolved, the state may reject the application and award funding to another project. If all issues are resolved within that 120 day time frame, the state issues a commitment.

Maintaining a proper level of oversight, providing initial training and capacity building for local administrators, and offering administrative support are critical issues for any states proposing to use such a decentralized process. Once MHFA issues a commitment, the local administrator is responsible for conducting the loan closing with the project owners, reviewing all of the HOME program requirements with them and recording the documents. Construction then starts, preceded by a preconstruction conference, also conducted by the local administrator. The local administrator is responsible for monitoring compliance with all HOME requirements during construction, with the state retaining authority for review and approval of all change orders. The administrator maintains documentation on compliance and sends copies to the state with funding requests.

When construction is complete, MHFA prepares a HOME completion report where staff review and sign off on all affirmative marketing procedures. At this time, the state mails payment to the local administrator, along with a declaration of the effective period of compliance with federal requirements (which is based on the affordability period on the HOME investment or 20 years for new construction). At successful completion of the project, local administrators may receive an administrative allowance, calculated as follows:

• $800 per development;

• $150 per unit for the first six HOME-assisted units in a project;

• $100 per unit for the remaining HOME-assisted units (over six) in a project;

• An additional $500 per development to projects with 12 or more HOME-assisted units.

During the five-year compliance period, administrators also are eligible for an allowance of $40 per unit on an annual (or biannual) basis. This allowance is intended to help cover the costs of performing the annual Housing Quality Standards inspections, and annual analyses of income, rental and utility allowance. Throughout the term of affordability, the state annually receives documentation on continued compliance with these items; it awards the annual administrative allocation only after it has reviewed and approved the documentation.

While the local administrators manage all of the work associated with individual projects, the state maintains a high level of oversight. Throughout the initial construction loan closing and the preconstruction conference, MHFA maintains continuous contact with the administrators, providing frequent and intensive guidance by phone. During construction, the state receives copies of all compliance documentation and approves any change orders. During the term of affordability, MHFA annually receives copies of documentation confirming compliance with income/rent surveys and Housing Quality Standards. Throughout the process, MHFA works with the local administrator as the single point of contact for all issues and questions regarding the use of the program; developers and property managers do not contact MHFA independently. While states may choose to have a single local contact, they may want to require that property management agents be involved in preconstruction conferences and may want to encourage administrators to promote strong relationships between property managers and property owners. Greater involvement of property management staff at the outset of the project can help ensure long-term affordability.

Staff have noted that the capacity of local administrators has grown enormously over the years and is considering scaling back the reporting requirements. Under federal regulations, the State HOME program administrator has extensive flexibility in determining what is required to be maintained either onsite at the project or by the local administrator and what must be copied to the state. States managing decentralized programs may determine what reporting they will require from local administrators. Some may consider relaxing these requirements as administrators gain experience and demonstrate competency. States initially should require administrators to provide copies of relevant documentation of federal compliance for both project construction (such as Davis-Bacon wage requirements) and property management (such as tenant income documentation). Payment of any administrative funds should be conditioned on receipt of materials to help ensure regular reviews and reports by the administrator.

States using a decentralized approach should track project management on some type of regular basis. For example, under the Targeted HOME program, staff receive monthly operating reports from the property management which are useful in quickly identifying problems within projects. Staff also make site visits twice yearly to assess ongoing project quality, unit turnover, delays in making mortgage payments, and any lease problems within the project. MHFA uses the same staff to assess applications up-front, provide assistance to project sponsors regarding management issues, and to monitor for compliance following construction completion. This provides greater consistency in the application of program requirements and project standards, and ensures that the staff are knowledgeable about property management and monitoring from project start to finish.

States should take immediate action on troubled properties. The First Mortgage loans benefit from the "Hot Team." If foreclosure threatens, staff involved in the initial project assessment form a team to go on site, meet with the project owners and management staff, and develop recommendations to stabilize the project and avoid foreclosure. This type of immediate, concerted action is essential to successful stabilization of the project.

In many cases, the local administrators with which MHFA works had existing capacity with federally-funded housing. Many of the local housing authorities had managed public housing, Section 8, Community Development Block Grant and Rental Rehabilitation Program funds. HOME carries complex requirements around income targeting and rent restrictions about which it is essential that administrators are knowledgeable since failure to comply with those requirements may trigger recapture of the HOME funds and sanctions. Representatives from a private property management firm interviewed during the site visit for this report note that it may be difficult to identify accurate rents and do annual recalculations (especially if rents vary among units), as well as to ensure that the format and language required for leases and other rental forms are used.

Minnesota provides training and information to the local administrator who in turn informs individual property managers. To ensure that the administrators are knowledgeable, MHFA staff conduct orientations for local administrators once project funds have been awarded.

Strong written guidance also is important. MHFA has developed an Administrator's Procedural Manual for the HOME Rental Rehabilitation Program which provides information and extensive supporting documentation specifically for use by the local administrator. One section within the manual identifies the administrator's responsibilities under the program, describes how those responsibilities must be met, and forms which must be completed by the administrator. The manual details administrator's responsibility for working with the property owner in marketing the units, providing a clear explanation of affirmative marketing and fair housing requirements. Specific forms which must be completed as a part of meeting the requirements are included as appendixes to the manual.

Similarly, the manual details when the Housing Quality Standards inspections must take place, encourages the administrator to have the owner involve local building inspectors in Housing Quality Standards inspections, and provides forms for the inspections within the manual. Detailed information also is presented on the annual review of rents, utility allowances and household incomes, and on lease requirements. The procedural manual includes a sample lease for HOME-assisted units, and identifies specific lease terms which are prohibited from being included in a HOME project lease. On an annual basis, MHFA sends new HOME rents to local administrators, with guidance on how they should be used, and how any new rents should be communicated to property owners. To help ensure that training and information provided is current and accurate, MHFA maintains a strong relationship with HUD, the National Association of Housing and Redevelopment Officials, and Minnesota Multihousing Property Owners.

Administrative funding of some level will likely be necessary in most state programs. MHFA notes that the administrative allowance fees it provides are not expected to be sufficient to support all of the administrator's program management costs, but they are instrumental in offsetting expenses. States will need to assess what they are asking of administrators in deciding on administrative allowances, and may want to structure those allowances to encourage certain types of projects, or to provide additional support for more difficult projects. For example, higher fees may be provided for projects which provide formal links to local supportive services, or for projects which utilize certain types of properties or which are developed or owned by certain kinds of organizations.

Fees may be supported through the state's ten percent HOME administrative allowance, or the state may want to establish requirements that the local administrator share --again, depending on their level of involvement in specific projects -- in the project developer's fee. States should consider requiring submission of compliance documentation as a condition of payment of local administrative fees.

Conclusion

This report addressed issues around both property management and compliance monitoring, intending by that structure to emphasize the importance of the former to the latter. State PJs may tend to focus so much attention on financing issues in the early stages of a project that they overlook or underestimate the importance of management issues to ultimate project success. On the surface, financing issues are more directly relevant to project feasibility. The impact of financing terms shows up immediately on a project pro-forma. However, the quality of management and adequacy of project reserves will help determine overall project feasibility. This report encourages state PJs to consider property management issues at the very beginning of the development process. This approach will help to ensure the continued economic and social viability of HOME-funded housing for years into the future.

This report has not directly addressed alternative approaches to management such as tenant management. As the HOME program becomes more established, and states are able to look back on a portfolio of projects to see which approaches are most effective, they may find additional incentives to look at management in new ways. The emphasis should continue to be on identifying strategies that work for each individual project. Although we may all learn from successful case studies, states must remain open to management approaches that will be as varied as the communities in which those projects are located.

Revised 12/16/99