The Community Development Division staff has received training on monitoring HOME funded projects to increase compliance with the U.S. Department of Housing and Urban Development (HUD) and to increase effectiveness in long-term monitoring. After completing this training, staff has begun to examine the legal documents of completed projects.

The City may only proceed with alterations to the Development Agreement with prior HUD approval. The issue is under review. In reviewing homeWORD’s High Sierra Development Agreement and homeowner agreements for the three remaining original homes in the project, staff has identified the following issues:

• Resale / Recapture: A “resale” provision was used in the Development Agreement and a “recapture” provision has been used in the homeowner agreements. HUD requires all HOME subsidies utilized for the development of a housing project either use the resale or recapture provision.

• Net Proceeds: Language on “net proceeds” should be included in the Development Agreement, which ensures the City would receive net proceeds post a foreclosure and would not be required to pay the full HOME investment back to HUD.

• Period of Affordability: The period of affordability identified in the Development Agreement for the amount of HOME funding invested in each of the units exceeds HUD’s minimum period of affordability. Each of the three homes has approximately $25,000 HOME investment, warranting an affordability period of 10 years (which has already passed), and the Development Agreement states a 20-year affordability period. Altering the affordability period does not impact repayment provisions to the City, as recapture provisions can remain active on a property following the completion of an affordability period.

homeWORD is a qualified Community Housing Development Organization (CHDO). The City is required to work with CHDOs to develop new affordable housing opportunities.

Council may:

• Approve modifying homeWORD’s Development Agreement to bring the project into compliance; or
• Not approve modifying homeWORD’s Development Agreement.

1) Modifying the Development Agreement to include a recapture provision would result in $60,000 repayment (up to $20,000 per home) when the remaining units are sold or refinanced, based on net proceeds from the transaction.

2) Including language on “net proceeds” in the Development Agreement would allow the City to recoup and reuse any remaining funding following a foreclosure.

3) Altering the affordability period can increase the amount of funding that can be included in HOME administration caps. Funding repaid to the City prior to the end of an affordability period is considered “recaptured” funding and cannot be used to calculate the 10% HOME administration cap. Funding repaid to the City after the end of an affordability period is considered “program income”, and 10% of this type of funding can be used for HOME administration.

Community Development staff is conducting a review of HOME funded, completed projects in order to further develop an effective monitoring plan subsequent to receiving additional training from HUD. The City of Billings staff and homeWORD have continued to work together since the inception of this project to improve compliance with this project for the remaining three homes. A work out plan was established and approved by HUD for homes that did not meet the affordability period.

Resale / Recapture: In reviewing homeWORD’s High Sierra Development Agreement, staff has found that both “resale” and “recapture” provisions were used on the same project.

• Resale: The home must be sold to another qualified, low-income homeowner for the duration of the affordability period. The new owner would then assume the HOME requirements for the remaining years of affordability.

• Recapture: The full HOME investment is repaid to the City when the unit is sold, refinanced or when the original homeowner no longer occupies the unit.

For all projects, only one provision is to be used. Modifying the Development Agreement with homeWORD to include the recapture provision would make it possible for the City to recoup the funds used to assist each project upon sale.

Net Proceeds: Language on “net proceeds” is also missing from the Development Agreement. This clause ensures, in the event of a foreclosure, the City will receive any net proceeds remaining from the transaction. Failure to include this language in agreements can result in non-compliance with affordability restrictions set forth by federal regulation. HUD requires full repayment of the HOME investment if a property does not comply fully with the minimum period of affordability. Therefore, the City may be at risk for losing approximately $25,000 on each of these homes.

Affordability Period: The period of affordability included in the Development Agreement was set at 20 years. However, the minimum period of affordability for a project with $25,000 of HOME funding invested per unit is only 10 years, which expired in January 2010. “Right-sizing” the period of affordability in agreements reduces long-term monitoring requirements for staff. As projects get funded, monitoring burden increases over time for decades.

The City is required to perform monitoring inspections for the entire period of affordability including: on-site housing quality standards inspections; resident file audits, and income source documentation reviews. HUD training personnel recommend careful consideration of the assignment of long-term periods of affordability over and above HOME requirements due to the increased burden on staff to continually monitor projects past minimum standards.

Seventeen total affordable housing projects have been funded through the HOME program since 1994. Of these, nine awards (53%) have been made to new rental construction projects which must be assigned a 20-year period of affordability. Lessening affordability periods for other projects to minimum standards eases the monitoring burden for a very limited staff.
Altering the affordability period does not impact repayment requirements established with recapture provisions. Projects with recapture provisions can be required to repay the City initial investments in perpetuity.

PROCEDURAL HISTORY
• April 1999 - City of Billings received an application for HOME funds for the “Billings Heights Venture” application from Montana People’s Action / homeWORD. Project staff identified in the application had experience with several HOME-funded affordable housing projects including rent-to-own, rental and single family projects. Local staff support for the project would be provided by homeWORD, and personnel had been trained in construction management and homeownership outreach.

• October 1999 - The funding application was reviewed by Community Development staff and was awarded 575 evaluation points out of a possible 600 points. Staff ratings were based on: planning process and housing needs; community efforts; implementation strategy; and program management / organizational capacity. Following evaluation, the application was forwarded to the Community Development Board and the Billings City Council. The project was fully funded through CHDO reserve funds for $160,000.

• October 2000 - homeWORD began to sell completed homes to income-eligible first time homebuyers. Eight homes were constructed and the $160,000 was utilized as direct assistance, secured via trust indenture, each house receiving an allocation of $20,000 for development. Payments were made directly to homeWORD as the Developer, and the period of affordability exceeded HUD’s guidelines at 20 years rather than the required 10 years.

The funding provided assisted with development costs and the cost to develop the units did not exceed the market value of the property. Therefore, recapture provisions can be invoked to assist a CHDO develop units and sell them at a price just under market value.
Repayment terms were included in homeWORD’s Development Agreement with the City and were linked to maintaining the affordability period for 20 years. Additional funding was allocated to the project through the City’s First Time Homebuyer program (up to $5,000 per home). The homes were sold at appraised value; therefore, the amount subject to recapture will be limited to the actual HOME funding invested in the project (approximately $25,000 per home).

• May 2006 - Several homeowners brought forth complaints regarding items which were covered under the construction warranty. Although homeWORD provided remedies to all homeowners, one homeowner refused homeWORD access to the home to make needed repairs. It is the City’s belief that homeWORD acted in good faith to address construction issues present in the homes. A lawsuit was eventually filed by four homeowners against the contractor and homeWORD among other defendants. After a long and costly process, the case was settled out of court by homeWORD without City participation in the settlement. The original homeowners were offered a settlement which included selling the homes to a for-profit developer for resale, and affordability was not a consideration in the sale.

• July 2008 – The City of Billings and homeWORD executed a HUD approved work out plan for the homes that did not meet the affordability period. homeWORD is repaying the City a total of $46,094, which represents the total loss of affordability. HUD has approved utilizing the repayment funding for HOME-eligible uses.

HOME REQUIREMENTS REVIEW
All projects with a HOME investment are required to choose either the resale or recapture provision. HOME projects are to never to have both provisions in them. HOME assisted projects are required to meet a minimum number of years in affordability depending on the amount of HOME funding invested in the project. HOME assistance amounts between $15,000 and $40,000 must meet a 10 year affordability period. homeWORD’s allocation per house is $20,000 and first time homebuyer assistance was utilized in amounts up to $5,000, establishing a total maximum assistance per unit of $25,000.

 - homeWORD, Inc.
 - City Community Development Division
 - U.S. Department of Housing & Urban Development

The change to the agreement is consistent with the City's Consolidated Plan for the use of federal funding. The Community Development Board reviewed the modification and approved the changes on March 1, 2011.