Affordable Rental Housing Program Manual Underwriting Guidelines

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Affordable Rental HousingProgram Manual&Underwriting GuidelinesApril 2017

2017 Affordable Rental Housing Program & Underwriting GuidelinesTable of ContentsIntroduction . 5Purpose . 5Policy Objectives . 5Disclaimers . 6Definitions . 7Eligibility . 13Eligible Activities . 13Eligible Applicants . 13Eligible Costs . 13Ineligible Costs . 14Eligible Properties . 14Ineligible Properties . 14General Project Requirements . 15Threshold Requirements. 15Site Control . 15Appraisal . 15Reasonable Costs . 16Procurement . 16Debarment and Suspension . 16Davis Bacon Weekly Payrolls . 17Affirmative Marketing. 17Waiver Requests . 17Underwriting Guidelines . 18Loan-to-Value Limits . 19Subsidy Layering . 19Inter-Creditor Agreement . 19Funding Conditions - Pre-Development Phase: . 20Funding Conditions - Acquisition Phase. 20Funding Conditions - Construction Phase . 20Loan Repayment . 20Assignment. 20Material Changes . 20Recourse . 21Loan Position: Subordination to Senior Debt . 21Debt Coverage Ratio (DCR) . 21Developer Fee . 21Replacement & Operating Reserves . 222Last updated 4/16/2017

2017 Affordable Rental Housing Program & Underwriting GuidelinesAnnual Operating Expenses . 22Vacancy Rate . 22Annual Income Growth . 23Annual Operating Expense Growth . 23Market Analysis. 24Market Study. 24Market Demand Needs Assessment Report . 32Developer Capacity . 35Threshold Criteria . 35Experience. 35Development Skills. 36Fiscal Soundness . 36Site Selection and Neighborhood Compatibility . 38Affordable Multi-Unit Family and Senior Housing Concentration Policy . 38Proximity to Site Amenities. 38Connectivity Requirements and Proximity to Transportation . 38Proximity to Negative Site Features . 39Zoning . 39Building Placement . 40Open Space . 40Sidewalks & Bike Facilities . 40Parking . 40Landscaping. 40Lighting. 41Development Requirements . 42Minimum Units . 42Code Compliance . 42Capital Needs Assessment . 42Sustainability and Energy Efficiency . 42Accessible and Adaptable Units . 43Federal and Other Regulations . 45Application Review Process . 46Application process . 46Evaluation . 47Rental Project Application Scoring Criteria . 49Experience. 49Performance Issues – City Programs . 49Site and Neighborhood Characteristics . 50Project Readiness . 513Last updated 4/16/2017

2017 Affordable Rental Housing Program & Underwriting GuidelinesTargeting . 51Relocation . 52Financial Structure . 52Award Notification & Post Award Instructions . 53Environmental Review . 53Written Agreement/Commitment . 53Disbursement . 54Reporting . 55Long Term Affordability Requirements . 56Recapture Provision for HOME funds . 56Income Determination Method . 56Income Recertification Schedule . 57Occupancy Restrictions . 57Rent Restrictions: Maximum HOME Rent Limits . 58Temporary Exceptions to Rent Limitations . 58Monitoring & Inspections . 594Last updated 4/16/2017

2017 Affordable Rental Housing Program & Underwriting GuidelinesIntroductionThe City of Colorado Springs, Community Development Division (CDD) administers federal fundsreceived from the US Department of Housing and Urban Development (HUD). The City receivesfunding under the Community Development Block Grant Program (CDBG), the HOMEInvestment Partnerships Program (HOME), and the Emergency Solutions Grant (ESG). The Cityuses the funds to preserve neighborhoods, create and preserve affordable housing, andstimulate economic revitalization.PurposeThe purpose of the Affordable Rental Housing Program & Underwriting Guidelines is to identifythe City’s affordable rental housing policy objectives, describe the activities available toadvance the objectives, and describe the manner in which the activities will be evaluated,underwritten, and selected for funding. The guidelines are intended to achieve compliance withfederal, state and local regulations and set the standards for all affordable rental housingprojects funded by the City of Colorado Springs, regardless of funding source.Policy ObjectivesThe City’s 2015-2019 Consolidated Plan and associated Annual Action Plans establish the policyobjectives for the Affordable Rental Housing Program. To receive federal funding under theabove-mentioned programs, HUD requires that the City submit a five-year Consolidated Plan,which describes the City’s priorities and objectives for each funding source. Additionally, theCity must submit an Annual Action Plan for each year of the Consolidated Plan. The AnnualAction Plan identifies the activities that will be funded during each fiscal year and the amountof funding allocated to each activity.Per the 2015-2019 Consolidated Plan, the City’s policy objectives include: Stabilize and improve struggling neighborhoods Increase and preserve the supply of affordable housing Invest in facilities and services that prevent and end homelessness5Last updated 4/16/2017

2017 Affordable Rental Housing Program & Underwriting GuidelinesDisclaimersThe City of Colorado Springs reserves the right to fund projects at a lower amount thanrequested, and the right to deny applications that are not consistent with the Consolidated Plangoals and policy direction. The City is under no obligation to consider or fund any proposedproject that does not demonstrate compliance with national objectives and eligible activities orlocal program requirements and does not assist in meeting the City’s affordable housing policygoals and/or objectives.The City reserves the right to determine project eligibility and select the funding source to beused for any proposed project. Funding decisions will be based on a variety of factors, not justapplication scores. Other factors considered are: the project aligns with the City’s priorities.Operational and management capacity of the applicant.Financial capacity of the applicant.The project’s potential for transformative impact on the residents and surroundingcommunity.5. Ability to meet loan payment obligations.6. Leveraging of additional public and private investments.The Affordable Rental Housing Program and Underwriting Guidelines are not intended toaddress every circumstance that may be encountered in the development process, nor are theya verbatim restatement of all regulatory requirements. Omission of any federal or localregulatory requirements does not relieve the City or the applicant from their respectiveobligations that may be required by the funding source.Once a loan agreement has been executed between the City and applicant for the purpose ofdeveloping rental housing according to these guidelines, in case of any conflict between theprogram guidelines and the loan agreement, the terms of the loan agreement shall prevail.CDD program guideline changes as a result of federal, state or local regulatory or legalrequirements may be implemented immediately by the Division Manager. Revision of theprogram guidelines usually occurs annually; however, additional revisions can be initiated bythe Division Manager at any time. While stakeholder outreach is the goal of CDD, such revisionsmay occur without notice and are applicable to all pending and future applications. Applicantsare responsible for complying with any changes.6Last updated 4/16/2017

2017 Affordable Rental Housing Program & Underwriting GuidelinesDefinitionsThe following terms are defined for the purpose of this document:Accessible – as defined by Section 504 of the Rehabilitation Act of 1973, accessible dwellingunits or facilities are located on an accessible route and can be approached, entered and usedby individuals with physical disabilities. For a housing unit to be classified as accessible, theimprovements must meet the Uniform Federal Accessibility Standards (UFAS).Acquisition of vacant land: HOME funds may be used for acquisition of vacant land only ifconstruction will begin on a HOME project within 12 months of the date of purchase. Landbanking is prohibited.Adaptable units – certain elements of a dwelling unit or facility can be added to, raised,lowered or altered to accommodate the needs of individuals with disabilities, or toaccommodate the needs of persons with different types or degrees of disability.Adjusted Income – gross household income limit that has been modified according to thenumber of persons residing within a dwelling unit.Affordable Housing – in general, housing for which the household is paying no more than 30percent of its income for gross housing costs, including glossary a.html)AMI – Area Median Income as defined by HUD and updated annually. Please consult with Citystaff for updated income tables.Annual Income: The gross amount of income of all adult household members that isanticipated to be received in the upcoming twelve (12) month period.Applicant: Any eligible entity (public or private, for profit or nonprofit), proposing to acquireand rehabilitate, convert, or construct affordable housing utilizing State HOME program funds.Application: The completed forms, exhibits, attachments, and any additional documentationrequested in the HOME application package. This includes but is not limited to, financialstatements, audits and/or letters of support from the local unit of government.Audit: Complete and current financial statements that have been audited by a Certified PublicAccountant (CPA) licensed by the State of Colorado. A current audit is considered to be one that7Last updated 4/16/2017

2017 Affordable Rental Housing Program & Underwriting Guidelinesis no more than twelve (12) months from the date the audit was performed. Non-Federalentities that expend 750,000 or more of Federal Funds in a year are required to have an auditconducted to include the audit specifications and requirements described in 2 CFR Part 200,Subpart F (aka Super Circular).Capital Needs Assessment – rehabilitation activities required to bring a building(s) intocompliance with Property Rehabilitation Standards (PRS) or Uniform Physical ConditionStandards and other standards as required by HUD.CDD – Community Development Division, City of Colorado Springs, ColoradoCommunity Housing and Development Organization (CHDO) – a type of non-profit, communitybased service organization that has, as part of its mission, the development of affordablehousing for low- and moderate-income households. HUD requires the organization to meetcertain requirements to be classified as a CHDO. See CHDO application for more information.City –City of Colorado Springs, ColoradoDebt Coverage Ratio (DCR) – the ratio of net operating income (NOI) to total debt service (DS)during a given time period (DCR NOI DS).Debt Service – required minimum monthly loan payment of principal and interest.Deferred Forgivable Loan: A loan in which all payment of principal and interest is deferred untilmaturity, at which time the outstanding balance may be considered paid in full so long as theborrower does not default on the HOME Funding Agreement or the Mortgage and SecurityAgreement.Development Costs: The total costs incurred in the development of a project that areconsidered reasonable and necessary.Developer: Any individual, association, corporation, joint venture, or partnership, whichpossesses the capacity to successfully produce affordable multifamily and/or single-familyrental housing.Disability – any person who has a physical or mental impairment that substantially limits one ormore major life activities; has a record of such impairment; or is regarded as having suchimpairment.8Last updated 4/16/2017

2017 Affordable Rental Housing Program & Underwriting GuidelinesElderly: A person sixty-two (62) years of age or older.Eligible Costs – project costs that can be paid with CDD funds. Costs include, but are not limitedto, costs or partial costs of acquisition, verifiable hard construction costs, reasonable soft costs,architectural and engineering fees, surveys, market studies, legal fee and materials testing.Fair Market Rents – rental rates as established and updated periodically by HUD that aredetermined to be fair, affordable and appropriate rents for a geographical area.HOME-Assisted Unit: The specific unit(s) in a project that is funded with HOME funds.HOME Rent – rental rates established by HUD as fair, affordable and appropriate rents for ageographical area. HOME Rents apply to HOME funded projects and are revised annually byHUD. Please consult with staff for updated HOME rent rates.Homeless and Chronically Homeless – as defined in The Homeless Emergency Assistance andRapid Transition to Housing Act of 2009 (HEARTH Act) (24 CFR 578.3). An individual who lacks afixed, regular, and adequate nighttime residence; as well as an individual who has a primarynighttime residence that is a supervised publically or privately operated shelter designated toprovide temporary living accommodations, an institution that provides a temporary residencefor individuals intended to be institutionalized, or a public or private place not designed for orordinarily used as a regular sleeping accommodation for human beings.Household – all persons who occupy a housing unit. The occupants may be a single family, oneperson living alone, two or more families living together, or any other group of related orunrelated persons who share living arrangements (24 CFR 570.3).HUD – U.S. Department of Housing and Urban DevelopmentIdentity of Interest Transactions – Identity of interest refers to situations where the owner,developer or project sponsor control or own the services to be provided in a project, including,but not limited to the general contractor, subcontractor, property manager or other serviceprovider. A declaration of subcontractors or suppliers for which there is an identity of interestthrough joint ownership with the owner or developer must be declared in the application forfunding to CDD. Failure to declare an identity of interest situation may deem a projectineligible.9Last updated 4/16/2017

2017 Affordable Rental Housing Program & Underwriting GuidelinesIncome – all reference to “Income” shall mean the annual income as defined in 24 CFR 5.609,referred to as "Part 5 annual income". Income cohorts are defined below. Income limits areupdated annually by HUD and can be found at www.hudexchange.infoExtremely Low Income – households whose income is less than 30% of the medianincome for the Colorado Springs Metropolitan Statistical Area (MSA), as determined byHUD, with adjustments for smaller or larger families.Low Income – households whose incomes are between 31% and 50% of the medianincome for the Colorado Springs Metropolitan Statistical Area (MSA), as determined byHUD, with adjustments for smaller or larger families.Moderate Income – households whose incomes are between 51% and 80% of themedian income for the Colorado Springs Metropolitan Statistical Area (MSA), asdetermined by HUD, with adjustments for smaller or larger families.Letter of Commitment: An original executed letter, contract, or agreement from each fundingsource verifying that the Applicant has a commitment of funds for the project. The commitmentletter must include: (a) the amount of funds being provided; (b) any conditions for receiving thefunds; (c) expiration of the funds or a timeframe in which the funds must be spent; (d) whetherthe funds are being provided as a loan or grant; and (e) the term and interest rate, if applicable,for the funds. Lines of credit and letters of credit are temporary funding and are not consideredpermanent commitments. All commitments must be submitted at time of application.LMI – low- and moderate-income household. A household having an income equal to or lessthan 80% of the Area Median Income limit established by HUD and updated annually.LMI Concentration Area - Community of Low-income Concentration: is defined as a U.S. CensusTract, Block Group, or other locally defined subarea of a community with a high proportion oflow income persons. A local determination may be made to select the most appropriategeographical definition of what constitutes a community. However, communities must becontiguous and relatively homogeneous areas with common identifiable characteristics andspecific boundaries. They cannot be whole municipalities. Such communities would beconsidered as having a low-income concentration if the number of low-income persons (lessthan 80% of median income) make up a majority (51% or more) of the population of thecommunity. Data to make this determination may come from U. S. Census information or otherdata that would be acceptable to HUD.Marketing Plan: A document that provides information on how the Applicant will attracteligible persons from all racial, ethnic, age, and gender groups to the available housing beingprovided in the particular market area.10Last updated 4/16/2017

2017 Affordable Rental Housing Program & Underwriting GuidelinesMarket Study: An independent third party report prepared to review the market conditions in aspecified area. It includes a study of the economic forces of supply and demand and theirimpact on real estate returns, risks, and values.Net Operating Income (NOI) – income stream generated by the operation of the property,independent of external factors such as financing, depreciation, amortization, and incometaxes. A property's yearly gross income less operating expenses. Gross income includes bothrental income and other income such as parking fees, laundry and vending receipts, etc.Operating expenses are costs incurred during the operation and maintenance of a property.They include repairs and maintenance, as well as insurance, management fees, utilities,supplies, property taxes, etc. The following are not operating expenses: principal and interest,capital expenditures, depreciation, income taxes, and amortization of loan points.Non-profit organization – a not-for-profit, non-sectarian organization, which is designated bythe Internal Revenue Service (IRS) under Section 501(c)(3), as a tax-exempt organization.Permanent Housing – housing in which the program participant must be the tenant on a leasefor a term of at least one year, which is renewable for terms that are a minimum of one monthlong and is terminable only for cause.Permanent Supportive Housing – permanent housing in which supportive services are providedto assist special needs populations to live independently.Program Income – gross income received by the subrecipient directly generated from the useof HOME funds with some exceptions. (24 CFR 570.500 and 24 CFR 92.2))Project Completion: Occurs when all necessary title transfer requirements have been finalized;HOME loan closing documents have been recorded and returned to the City; one hundredpercent (100%) of the construction has been completed; a certificate of occupancy (CO) hasbeen issued; a placed-in-service application has been submitted; the final draw down of HOMEfunds has been disbursed f

2017 Affordable Rental Housing Program & Underwriting Guidelines Elderly: A person sixty-two (62) years of age or older. Eligible Costs - project costs that can be paid with CDD funds. Costs include, but are not limited to, costs or partial costs of acquisition, verifiable hard construction costs, reasonable soft costs,

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