[Federal Register Volume 75, Number 131 (Friday, July 9, 2010)]
[Notices]
[Pages 39561-39573]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-16827]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5417-N-01]


Administrative Guidelines; Subsidy Layering Reviews for Proposed 
Section 8 Project-Based Voucher Housing Assistance Payments Contracts

AGENCY: Office of the Assistant Secretary for Public and Indian 
Housing, HUD.

ACTION: Notice.

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SUMMARY: This document provides Administrative Guidelines which 
qualified Housing Credit Agencies (HCAs) as defined under Section 42 of 
the Internal Revenue Code of 1986 (IRC), must follow in implementing 
subsidy layering reviews in accordance with the requirements of Section 
2835(a)(1)(M)(i) of the Housing and Economic Recovery Act of 2008 
(HERA). In certain instances, described below, HUD will follow these 
Guidelines in implementing subsidy layering reviews to satisfy the 
requirements of Section 102(d) of the Department of Housing and Urban 
Development Reform Act of 1989 (HUD Reform Act or HRA). The 
requirements in this Notice, which implement the requirements of 
Section 2835(a)(1)(M)(i) of HERA, do not supersede the subsidy layering 
requirements of other Federal programs.
    Section 102(d) of the HUD Reform Act was enacted to ensure that 
Housing projects receiving HUD assistance do not receive excessive 
compensation by combining various forms of HUD program assistance with 
assistance from other Federal, State, or local agencies (other 
Government Assistance). Section 2835 (a)(1)(F) of HERA provides that 
for project-based voucher housing assistance payments (HAP) contracts 
for existing housing, a subsidy layering review in accordance with 
section 102(d) of the HRA shall not be required. Under HERA, when 
project-based voucher assistance is proposed for newly constructed and 
rehabilitated structures, subsidy layering reviews may be satisfied if 
the applicable State or local agency has conducted such a review. HUD 
has defined these agencies to be qualified housing credit agencies 
(HCA), which may include State housing finance agencies, participating 
jurisdictions under the HOME program, or other State housing agencies 
that meet the definition of a HCA as defined under Section 42 of the 
IRC of 1986.
    This Notice sets forth the guidelines HCAs must use in conducting 
subsidy layering reviews for newly constructed and rehabilitated 
structures combining

[[Page 39562]]

other forms of government assistance, and Section 8 project-based 
voucher assistance.

FOR FURTHER INFORMATION CONTACT: Michael Dennis, Deputy Director, 
Office of Voucher Programs, Office of Public and Indian Housing, 
Department of Housing and Urban Development, 451 7th Street, SW., Room 
4228, Washington, DC 20410; telephone number 202-402-3882 (this is not 
a toll-free number). Individuals with speech or hearing impairments may 
access this number through TTY by calling the toll-free Federal 
Information Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

A. The Housing Economic Recovery Act of 2008

    HERA (Pub. L.110-289) was enacted July 30, 2008. HERA made numerous 
revisions to the Section 8 project-based voucher program. On November 
24, 2008 (73 FR 71037), HUD published a Federal Register Notice to 
provide information about HERA's applicability to HUD's public housing 
and Section 8 tenant-based and project-based voucher programs. That 
Notice provides an overview of key provisions of HERA that affect HUD's 
public housing programs, and identifies those provisions that are self-
implementing requiring no action on the part of HUD for participants to 
commence taking action to be in compliance, and those provisions that 
require implementing regulations or guidance on the part of HUD. The 
November 24, 2008, Notice states that the HERA provision relating to 
the elimination of subsidy layering reviews for existing housing is 
self-implementing; the provision relating to State or Local agencies 
performing subsidy layering reviews for project-based voucher HAP 
contracts for new construction and rehabilitated projects is not self-
implementing. The Notice states that guidance on how such reviews must 
be conducted would be forthcoming and this Notice provides such 
guidance.

B. Section 102 of the HUD Reform Act of 1989

    24 CFR part 4 implements section 102 of the HRA, (42 U.S.C. 3545) 
and contains a number of provisions designed to ensure greater 
accountability and integrity in the way in which the Department makes 
assistance available under certain of its programs. Section 4.13 of 24 
CFR requires HUD to certify, in accordance with section 102(d) of the 
HRA, that assistance made available by the Department for a specific 
housing project will not be more than is necessary to make the assisted 
activity feasible after taking into account assistance from other 
government sources. In order to make that certification, a subsidy 
layering review must be performed. HERA eliminates the certification 
requirement of 24 CFR 4.13 for new construction and rehabilitated 
housing under the project-based voucher program where the applicable 
State or local agency has performed a subsidy layering review. 
Certification under section 102(d) of the HRA is still required, 
however where HUD conducts the review.

C. Section 911 of the Housing Community Development Act of 1992

    Section 911 of the Housing Community Development Act of 1992 (Pub. 
L. 102-550, approved October 28, 1992) (HCDA), allows State HCAs to 
perform subsidy layering review certifications to satisfy the 
requirements of section 102(d) of the HRA for projects utilizing or 
expecting to utilize low-income housing tax credits (LIHTCs). To date, 
however, the Department has not delegated its authority to HCAs for 
subsidy layering reviews required for covered projects receiving 
Section 8 project-based vouchers. While Section 911 of the HCDA is a 
discretionary provision that PIH has not implemented for projects 
receiving project-based voucher assistance, section 2835(a)(1)(F) of 
HERA is mandatory and shall be satisfied pursuant to HERA and these 
Administrative Guidelines, instead of Section 911.

II. Certification

A. HUD's Certification Requirements Pursuant to 102(d) of the HUD 
Reform Act

    24 CFR 4.13 states that before HUD makes any assistance subject to 
the subpart available with respect to a housing project for which other 
government assistance is, or is expected, to be made available, HUD 
will determine, and execute a certification, that the amount of the 
assistance is not more than is necessary to make the assisted activity 
feasible after taking account of the other government assistance. This 
review certifies no overlap of government subsidies when combining HUD 
housing assistance and forms of other Federal, State or local 
government assistance. Where a HCA has performed a subsidy layering 
review for a project that has been allocated LIHTCs and the subsidy 
layering review took into consideration the proposed project-based 
voucher assistance, section 2835(a)(1)(F) of HERA eliminates the need 
for the HRA section 102(d) certification requirement. However, HUD's 
obligation to certify in accordance with 102(d) of the HRA and 
implementing regulations at 24 CFR 4.13 still exists where a review has 
not been substituted in accordance with the Guidelines contained in 
this Notice.
    In addition, since a HCA is designated for the purpose of 
allocating and administering the LIHTC program under section 42 of IRC, 
and there will be cases where there are other forms of government 
assistance involved in proposed project-based voucher projects that do 
not include LIHTC, in those cases where the HCA is not able to conduct 
such reviews, HUD will conduct subsidy layering reviews and make the 
required HRA section 102(d) certification in accordance with 24 CFR 
4.13 for such projects. HUD will also conduct the review where there is 
no HCA available, or the applicable HCA has declined to perform the 
subsidy layering review.

B. HCA Certification Under HERA

    With the enactment of HERA, a HRA section 102(d) certification is 
not required by the applicable HCA performing the review. These 
Guidelines require that HCAs make an initial certification to HUD when 
the agency notifies HUD of its intent to participate. The HCA 
certification provides that the HCA will, among other things, properly 
apply the Guidelines which HUD establishes. In addition, after a 
subsidy layering review has been performed or where one has already 
been performed, HCAs must certify that the total assistance provided to 
the project is not more than is necessary to provide affordable housing 
(Appendix B).

III. Intent To Participate

    A HCA must notify HUD of its intent to participate before any 
subsidy layering reviews are performed pursuant to this Notice. 
Questions or requests for clarification relating to subsidy layering 
reviews for units under the project-based voucher program and the 
implementation of these Guidelines should be addressed to HUD 
Headquarters, Section 8 Financial Management Division, and should be 
answered prior to an HCA's notification to HUD of its intent to 
participate.

A. Letter to HUD

    An interested HCA must apprise HUD of its intent to perform subsidy 
layering reviews for newly constructed and rehabilitated projects that 
will receive project-based voucher assistance by

[[Page 39563]]

sending a brief letter (Appendix A), executed by an authorized official 
of the HCA informing HUD that it (1) has reviewed these Administrative 
Guidelines; (2) understands its responsibilities under these 
Administrative Guidelines; and (3) certifies that it will perform the 
subsidy layering review as it relates to project-based voucher 
assistance in accordance with all statutory, regulatory and Guideline 
requirements. Such letters should be forwarded via e-mail to the 
Section 8 Financial Management Division at HUD Headquarters at the 
following address: [email protected].

B. HUD Acknowledgement

    Once HUD has been notified of an HCA's intention to participate, 
HUD will acknowledge that participation by a written letter to the HCA, 
and post the agency's name on the Office of Public and Indian Housing's 
Web site as a participating agency. Once an HCA's intent to participate 
has been acknowledged by HUD through the response letter, that agency 
may perform subsidy layering reviews, and certify such reviews have 
been performed, for proposed project-based voucher HAP contracts for 
newly constructed or rehabilitated units in accordance with the 
Agency's existing requirements, provided such requirements are in 
substantial compliance with these Guidelines.

C. Revocation of Participation

    If HUD determines that a HCA has failed to substantially comply 
with these Guidelines, or statutory or regulatory requirements, HUD may 
revoke the HCA's authority to perform subsidy layering reviews for 
proposed project-based voucher HAP contracts. HUD will inform the HCA 
in writing of such determination.

D. HUD Participation

    HUD will follow these Guidelines in conducting the required subsidy 
layering reviews, and issue a HRA section 102(d) certification pursuant 
to such review, for projects in cases where the HCA's authority has 
been revoked by HUD; in cases where an HCA opts to not accept the 
responsibilities pursuant to section 2835(a)(1)(F) of HERA; and in 
those cases where project-based voucher assistance is combined with 
other government assistance that does not include LIHTCs, and the HCA 
does not have the authority to conduct such review.

IV. Definitions

    Category 1 Subsidy Layering Review--Subsidy layering review for 
proposed project-based voucher HAP contracts where the HCA will 
conduct the review and it will consider project-based voucher 
assistance.
    Category 2 Subsidy Layering Review--Proposed project-based 
voucher HAP contracts where a subsidy layering review has been 
performed by an HCA without consideration of project-based voucher 
assistance.
    Covered Assistance and Affected HUD Programs includes any 
contract, grant, loan, cooperative agreement or other form of 
assistance, including the insurance or guarantee of a loan or 
mortgage, that is provided under a program administered by the 
Department for use in, or in connection with, a specific housing 
project. Assistance provided under Section 8(o)(13) of the U.S. 
Housing Act of 1937 (42 U.S.C. 1437f) (project-based vouchers) for 
new construction or rehabilitated projects is considered ``covered 
assistance'' under section 102(d) of the HRA for subsidy layering 
review purposes.
    Other government assistance is defined to include any loan, 
grant, guarantee, insurance, payment, rebate, subsidy, credit, tax 
benefit, or any other form of direct or indirect assistance from the 
Federal government, a State, or a unit of general local government, 
or any agency or instrumentality thereof.
    Substantial Compliance--For purposes of making the HERA 
certification, a HCA may perform subsidy layering reviews for 
proposed project-based voucher HAP contracts for newly constructed 
and rehabilitated units in accordance with the Agency's existing 
requirements, provided such requirements are in substantial 
compliance with these Guidelines. To be in substantial compliance, 
the Agency's guidelines shall be at least as stringent as these 
Guidelines, and require equivalent disclosures from the ownership 
entity.

V. Public Housing Authority (PHA) Responsibilities

A. When Subsidy Layering Reviews Are Required

    PHAs must request a subsidy layering review when a new construction 
or rehabilitation project has been selected pursuant to program 
regulations at 24 CFR part 983 and the project combines other forms of 
governmental assistance. As part of the selection process, the PHA must 
require information regarding all HUD and/or other Federal, State or 
local governmental assistance to be disclosed by the project owner. 
Form HUD-2880 (Appendix C) may be used for this purpose, but is not 
required. The PHA must also instruct the owner to complete and submit a 
disclosure statement even if no other governmental assistance has been 
received or is anticipated. The statement must be submitted with the 
owner's application for project-based vouchers. The PHA must also 
inform the owner that if any information changes on the disclosure, 
either by the addition or deletion of other governmental assistance, 
the project owner must submit a revised disclosure statement. If before 
or during the HAP contract, the owner receives additional HUD or other 
governmental assistance for the project that results in an increase in 
project financing in an amount that is equal to or greater than 10 
percent of the original development budget, the Owner must report such 
changes to the PHA and the PHA must notify the HCA, or HUD (if there is 
no participating HCA in their jurisdiction), that a further subsidy 
layering review is required.

B. Requesting Performance of Subsidy Layering Reviews

    The PHA must request a subsidy layering review through the 
participating HCA. A list of participating HCAs will be posted on HUD's 
Office of Public Housing's Web site and updated periodically. If an HCA 
is not designated in the PHA's jurisdiction, the PHA should contact the 
Office of Public Housing and Voucher Programs, Financial Management 
Division. The PHA will be informed if there is in fact an HCA in their 
jurisdiction that will conduct the review or if the PHA must submit the 
required documentation to HUD Headquarters for the subsidy layering 
review.

C. Providing Documents Required for Review

    The PHA is responsible for collecting all required documentation 
from the owner. The documentation required is contained within Appendix 
D. The PHA is also responsible for providing the HCA with all documents 
required for the subsidy layering review. The documents must be 
forwarded to the HCA with a cover letter. If the initial submission to 
the HCA is incomplete, the HCA is in need of further documentation, or 
if new information becomes available, the PHA must provide the 
documentation to the HCA during the review process.
    The PHA should contact the HCA to determine whether any documents 
the PHA is required to provide are already in the possession of the 
HCA. If the most recent copies of documents the PHA has collected from 
the owner are already in the HCA's possession, the PHA must state in 
its cover letter to the HCA which documents are not included because 
the HCA has informed it that the documents are already in the HCA's 
possession. The PHA must still maintain a complete set of the required 
documents with the project file for

[[Page 39564]]

quick reference by either HUD or the PHA.

D. Subsidy Layering Review Timing and Outcome

    In accordance with program regulations at 24 CFR 983.55, a PHA may 
not provide project-based voucher assistance until after the required 
subsidy layering review has been performed in accordance with these 
Guidelines. Therefore, before entering into an Agreement To Enter into 
Housing Assistance Payments Contract (AHAP), the PHA must await the 
outcome of the subsidy layering review. All other pre-AHAP requirements 
must also be satisfied before AHAP execution (e.g., environmental 
review). If the HCA with jurisdiction over the project has conducted 
the subsidy layering review, the HCA must certify to HUD that the 
project-based voucher assistance is in accordance with HUD subsidy 
layering requirements. The HCA must provide a copy of the certification 
to the PHA to signify to the agency that the subsidy layering review 
has been completed and a determination has been made that the project-
based voucher assistance does not result in excessive government 
assistance. The PHA may proceed to execute an AHAP at that time.
    If the subsidy layering review results in excessive public 
assistance, the HCA will notify HUD, in writing, with a copy to the 
PHA, of the outcome. The notification will include either a 
recommendation to reduce the LIHTC allocation, proposed amount of PBV 
assistance, or other assistance, or a recommendation to permanently 
withhold entering into an AHAP for the proposed project. HUD will 
consult with the HCA and the PHA prior to issuing its final 
determination either adopting the HCA' s recommendation or revising the 
recommendation. Once the PHA receives HUD's final decision, the PHA 
must notify the owner in writing of the outcome.
    If HUD conducts the review, HUD is responsible for making the 
required HRA section 102(d) certification pursuant to 24 CFR 4.13. If 
it is determined that the project-based voucher assistance does not 
result in excessive government subsidy, HUD will notify the PHA in 
writing. If it is determined that combining housing assistance payment 
subsidy under the project-based voucher program with other governmental 
assistance results in excessive public assistance, HUD will require 
that the PHA reduce the level of project-based voucher subsidy or 
inform the owner that the provision of project-based voucher assistance 
shall not be provided.

VI. Subsidy Layering Review Categories--Overview

A. Category 1--Proposed Project-Based Voucher HAP Contracts Where the 
HCA's Subsidy Layering Review Includes Proposed Project-Based Voucher 
Assistance

    Section 2835(a)(1)(F) of HERA provides that a subsidy layering 
review in accordance with section 102(d) of the HRA is not required if 
a subsidy layering review has been conducted by a qualified HCA. 
Section 42(m)(2) of the IRC mandates that HCAs ensure that the amount 
of housing tax credit awarded to a project is the minimum amount 
necessary for the project to be placed-in-service as affordable rental 
housing. As part of its Section 42(m)(2) review, the HCA considers all 
Federal, State, and local subsidies which apply to the project. In 
making the determination that the LIHTC dollar amount allocated to a 
project does not exceed the amount the HCA determines is necessary for 
the financial feasibility of the project, the HCA must evaluate and 
consider the sources and uses of funds and the total financing planned 
for the project, the proceeds expected to be generated by reason of the 
LIHTC, the percentage of the LIHTC dollar amount used for project 
costs, and the reasonableness of the developmental and operational 
costs of the project. The subsidy layering review Guidelines under this 
Notice are similar to those required under the IRC section 42(m)(2) 
review.
    The amendment made to the requirements of HRA section 102(d) 
pursuant to section 2835(a)(1)(F) of HERA (for purposes of project-
based voucher assistance), alleviates the duplication of subsidy 
layering reviews (that consider the same factors for the same reasons) 
by both HUD and HCAs. The only other review element that an HCA must 
consider with the addition of project-based voucher assistance to a 
proposed project, is the effect the operational support provided by the 
project-based vouchers will have on the HCA's analysis in regards to 
the level of subsidy required to make the project feasible without over 
compensation. HCAs must therefore analyze the operating pro forma that 
reflects the inclusion of the project-based voucher assistance as part 
of the subsidy layering review process. The operational support 
analysis will consider the debt coverage ratio (DCR) and the amount of 
cash-flow generated by an individual project to determine if excess 
funding exists within the total development budget.
    In light of the above, when a proposal for project-based voucher 
assistance is contemporaneous with the application for or award of 
LIHTCs, the subsidy layering review required by these Guidelines may be 
fulfilled by the IRC section 42(m)(2) review, if such review 
substantially complies with the subsidy layering review requirements 
under this Notice. The Department expects that in most cases it will. 
If the IRC section 42(m)(2) review substantially complies with the 
requirements of a subsidy layering review under this Notice, the HCA 
may make the required certification (Appendix B) to HUD without 
conducting an additional subsidy layering review pursuant to these 
Guidelines. If the HCA can not make the required certification because 
the operation pro forma was not reviewed as part of its IRC section 
42(m)(2) review in the manner required by these Guidelines, the HCA 
must perform the limited review as described in section VII. B. of this 
Notice, and if necessary reduce the subsidy source within its control-- 
(i.e., the total tax credit allocation amount) or promptly notify HUD 
of a recommendation to reduce the project-based voucher units or 
subsidy.
    Where HUD conducts the review, for the reasons previously stated, 
in addition to evaluating the operational budget, HUD must analyze 
whether certain development costs (specifically general condition, 
over-head, profits, and developer's fee) are or were excessive. If it 
is determined that such costs are excessive, HUD will reduce the amount 
of project-based voucher assistance to a level that will sustain the 
projects viability without overcompensation. HUD will notify the PHA 
before any action to reduce the project based vouchers units due to 
issues of overcompensation.

B. Category 2--Proposed Project-Based Voucher HAP Contracts Where 
Subsidy Layering Review Has Been Performed by Qualified HCA Without 
Consideration of Project-Based Voucher Assistance

    Where a subsidy layering review has been conducted by a HCA on a 
proposed project-based voucher project for purposes of allocating 
LIHTCs which may have also included other forms of government 
assistance, but such review did not consider project-based voucher 
assistance (e.g., project-based vouchers were obtained subsequent to 
the LIHTC allocation), the HCA may conduct a limited review with an 
emphasis on the operational aspects of the project in accordance with 
Section VII. B. of these Guidelines.
    Although project-based voucher projects under Category 2 must 
undergo a limited subsidy layering review, the HCA must still be able 
to certify when

[[Page 39565]]

combining HUD and other governmental assistance, including project-
based voucher assistance, that the project is not receiving excessive 
compensation. The HCA will be able to make this certification if the 
review performed as required by section 42(m)(2) of the IRC 
substantially complied with these Guidelines. In addition to ensuring 
there is no excessive subsidy, the review must also consider whether 
there is any duplicative forms of assistance (i.e., rental assistance 
from some other State, Federal or local source). If it is found that 
there is duplicative rental assistance for the same unit, the unit does 
not qualify for project-based voucher assistance, and the HCA must 
apprise the PHA of such finding. For purposes of this analysis, LIHTC 
units are not considered duplicative rental assistance.

VII. Subsidy Layering Review Guidelines--Procedural Description

    Subsidy layering reviews are required prior to the execution of an 
AHAP for new construction and projects that will undergo 
rehabilitation, if the project combines project-based voucher 
assistance with other governmental assistance. When an HCA has 
conducted a subsidy layering review in connection with the allocation 
of LIHTC, the standards used by the HCA must substantially comply with 
these Guidelines. When HUD is conducting the subsidy layering review, 
it will follow these Guidelines and use the Subsidy Layering Review 
Analysis form (Appendix E).

A. Category 1 Subsidy Layering Reviews

    For Category 1 projects, HCAs will review all proposed sources and 
uses of funds. HCAs will also consider all loans, grants, or other 
funds provided by parties other than HUD and will assess the 
reasonableness of any escrow or reserve (i.e., maintenance, 
operational, and replacement reserves) proposed for the project, even 
if such reserves do not affect the amount of subsidy allowed under 
applicable program rules.
1. Development Standards--In General
a. Safe Harbor
    Safe Harbor standards are generally applicable development 
standards. Although the safe harbor standards can be exceeded under 
certain circumstances, projects for which the owner's documented 
development costs and fees are within the safe harbor standards can 
move forward without further justification. If any of the owner's costs 
and/or fees exceed the safe harbor limits, but are within the maximum 
allowable amount, additional justification and documentation are 
required.
b. Maximum Allowable Amounts
    Maximum Allowable Amounts by comparison are those that cannot be 
exceeded under any circumstances. If values provided by the project 
owner exceed the maximum allowable amounts, reductions must be made in 
either the proposed amount of PBV assistance, or the LIHTC equity to 
bring the values below the maximum allowable amounts before the HCA can 
make its certification to HUD and where HUD is performing the review, 
before the HRA section 102(d) certification can be made. In the case of 
LIHTC syndication proceeds, if the values provided by the project owner 
are lower than the minimum LIHTC price, the PHA shall not enter into an 
AHAP with the owner unless the LIHTC allocation is reduced to bring the 
value of the tax credits at or above the minimum LIHTC price.
    Between the safe harbor standard and the maximum allowable amounts 
for each of the factors considered in the review is a range in which 
values may be acceptable if, in the opinion of the reviewer, they are 
justified based on project size, characteristics, location, and risk 
factors. Additional documentation must be requested from the project 
owner that demonstrates the need for values that exceed the safe harbor 
standards. If the review is being conducted by an HCA, instead of HUD, 
project costs exceeding the safe harbor standards must be consistent 
with the HCA's published qualified allocation plan. Under no 
circumstances may costs exceed the total maximum allowable amounts.
    For all projects falling within category 1, the reviewer (either an 
HCA, or HUD) must evaluate development costs to determine whether pre-
development cost associated with the construction of the project is 
within a reasonable range, taking into account project size, 
characteristics, locations and risk factors; whether over-head, 
builder's profit and developer's fee are also within a reasonable 
range, taking into account project size, characteristics, locations and 
risk factors.
2. Equity Capital and Syndication Proceeds--In General
    If the project involves the use of LITHCs, the subsidy layering 
review must also include an analysis of the equity that is made 
available to the project through the syndication or sale of LIHTCs. The 
amount of equity capital contributed by investors to a project 
partnership shall not be less than the amount generally contributed by 
investors in current market conditions, as determined by the HCA. The 
HCA must act during the development process to ensure that syndication 
proceeds going into the project are kept within an acceptable range.
3. Safe Harbor Percentage Allowances
    HCAs will use the following safe harbor standards which HUD has 
established for subsidy layering analysis purposes for project-based 
voucher HAP contracts: The percentage allowances may be negotiated 
between the safe harbor and maximum allowable amounts with the project 
sponsor and the individual HCAs to reflect their assessment of the 
market and to respect their qualified allocation plan. Any approved 
fees that exceed safe harbor amounts must be justified by special 
circumstances.
a. Standard (1)
    General Condition safe harbor--six percent (6%) of construction 
contract amount.
b. Standard (2)
    Over-head safe harbor--two percent (2%) of construction contract 
amount.
c. Standard (3)
    Builder's Profit: Safe harbor--six percent (6%) of construction 
contract amount.
    The total allowed or allowable Safe Harbor percentages for General 
Conditions, Overhead and Builder's Profit are based on hard 
construction costs and the maximum combined costs shall not be more 
than 14% of the hard construction cost.
d. Standard (4)
    Developer's fee: Safe harbor--twelve percent (12%) of the total 
development cost (profit and overhead);
    The maximum allowable developer's fee is 15% of the project costs 
(profit and overhead).
4. Net Syndication Proceeds
    LIHTCs safe harbor shall be determined by the HCA conducting the 
review based on the equity market in its State. The HCA must carefully 
consider the equity market and establish and enforce reasonable equity 
pricing assumptions. If the amount of equity going into the project 
from the syndication of tax credits is below the current market price 
limit without satisfactory documentation of the reasons for the lower 
amounts, the PHA shall not enter into the AHAP with the owner.

[[Page 39566]]

5. When Development Costs Are Excessive
    If the costs for builder's profit, or developer's fee, exceed the 
safe harbor values without satisfactory documentation for the need for 
higher costs, either the HCA or HUD will take the actions outlined 
below:
a. HCA Performing Review
    In cases where a HCA is performing the review, the HCA must reduce 
the subsidy source within its control, i.e., the total tax credit 
allocation amount, whenever necessary to balance the project's sources 
and uses.
b. HUD Performing Review
    Where HUD is performing the review and it is determined that after 
evaluating allowable sources and uses that the combination of 
assistance will result in excessive subsidy, HUD will reduce the 
proposed amount of PBV assistance.
6. When Development Costs Are Within Safe Harbor
    If all Safe Harbor standards are met, the HCA must examine the 
effect project-based voucher assistance will have on the operations pro 
forma before making its LIHTC allocation. If the Safe Harbor and 
operational standards (discussed in sub-section 8 directly below) are 
met, the HCA must submit its certification to HUD with a copy to the 
applicable PHA along with its sources and uses statement. If HUD is 
conducting the review, HUD will make the determination and notify the 
PHA that an AHAP may be signed.
7. Operations Standards
a. Debt Coverage Ratio
    In addition to the analysis of the development budget as part of 
the subsidy layering review process, the HCA must also evaluate the 
project's 15-year operating pro forma and apply the standards discussed 
below and contained within the Operations section of Appendix E. 
Project-based voucher assistance and the amount of cash flow the 
project-based voucher rent amounts will generate for a given project 
must be carefully analyzed. The HCA must analyze the project's 
projected Debt Cover Ratio (DCR) over a 15-year period (the maximum 
initial term of the project-based voucher HAP contract). The DCR is 
determined to ensure that the net-income for the project is sufficient 
to cover all repayable debt (i.e., non-forgivable loans) over the life 
of the debt. In order to determine realistic costs over a 15-year 
period, the HCA must use appropriate trending assumptions for their 
market area. Generally, operating expenses should be trended at 3% to 
7% per year and rent increases should be trended at 2% to 5% per year 
for the first 5 years and 5% for each year thereafter.
    The minimum DCR is 1.10 and the maximum DCR may be up to 1.45 
provided cash flow for the project does not exceed the limit 
established in accordance with section VII.A.7.b. of this Notice.
    If it is projected that the DCR will not fall below the minimum 
DCR, the project should have sufficient cash flow to pay all project 
operating expenses; pay all amortized debt on the project, and have an 
acceptable percentage of the required debt service available for other 
uses. In addition, the established DCRs should ultimately provide 
sufficient cash-flow to subsidize very low-income and extremely low-
income families through the project-based voucher program that the 
LIHTC program is unable to reach.
    If the DCR exceeds the maximum stated above, there may be 
government assistance in the project which is more than necessary to 
make the project feasible.
    Since variances in such things as vacancy rate, operating cost 
increases, and rent increases all affect the net operating income of a 
project, the HCA must perform further trending analysis to determine 
whether the number of proposed project-based vouchers should be reduced 
or whether the proposed rent amounts should be reduced. For example, if 
over the 15-year period the DCR begins to decrease and at some point it 
falls below the minimum of 1.10, all trending assumptions and costs 
should be re-visited before recommending a reduction in the project-
based voucher subsidy. After further analysis, if the DCR is still at a 
level above the maximum allowable level, the HCA may either reduce the 
LIHTC allocation amount (for category 1 projects) or recommend to HUD 
the appropriate PBV subsidy amount including supporting documentation. 
HUD will require that the PHA reduce the level of project-based voucher 
subsidy. When HUD is performing the review, HUD will, if necessary, 
reduce the voucher units or monthly project-based voucher rents 
proposed by the PHA.
b. Cash-Flow
    In addition to determining an acceptable DCR, actual cash flow to 
the project must also be analyzed. Cash-flow is determined after 
ensuring all debt can be satisfied and is defined as total income to 
the project minus total expenses. If the cash flow (minus any 
acceptable reserve amounts) exceeds 10% of total expenses, the cash 
generated from the project-based voucher assistance may be greater than 
is necessary to provide affordable housing. If the cash-flow is greater 
than 10% of the total operating expenses, the HCA must require the 
owner to re-visit the operating pro-forma to bring cash flow to a level 
that does not exceed 10% of the total operating expenses. If the owner 
declines, the HCA shall recommend to HUD a reduction in the project-
based voucher rents or the number of project-based voucher units. Any 
recommendation shall include documentation to support the HCA's 
recommendation. When HUD performs the review, and cash flow is greater 
than 10% of the total operating expenses, HUD will notify the PHA of 
its determination and instruct the PHA to require the owner to re-visit 
the operating pro-forma to bring the cash flow to a level that does not 
exceed 10% of the total operating expenses. If the owner declines, HUD 
will notify the PHA of the maximum number of project-based voucher 
units that may be approved and the maximum project-based voucher rent 
amounts that may be approved.

B. Category 2 Subsidy Layering Reviews

    Projects falling within Category 2 shall only be required to 
undergo a limited review. The limited review shall consist of a review 
of the 15-year Operations Pro Forma and a review to ensure there is no 
duplicative assistance (as stated above in section VI.B.). The 
Operating Standards outlined in section VII.A.7. above shall be used 
for Category 2 subsidy layering reviews. Where it is determined that 
the inclusion of project-based voucher assistance will result in 
governmental assistance that is more than necessary to provide 
affordable housing, the HCA will make a recommendation, including 
supporting documentation, to HUD as to the appropriate PBV subsidy 
amount. If HUD is performing the review, HUD will, if necessary, reduce 
the voucher units or monthly project-based voucher rents proposed by 
the PHA.

VIII. Monitoring

    HUD may perform quality control reviews of subsidy layering reviews 
performed by participating HCAs. The quality control reviews will 
examine the following:
     Whether all required documents and materials were 
available to the reviewer.

[[Page 39567]]

     Whether the values were correctly determined to be inside 
or outside of the approvable range.
     If values were above the safe harbor standards, whether 
sufficient documentation was available to the reviewer to justify the 
higher costs.
     If necessary, whether subsidy was reduced correctly.
    If it is determined that any required documentation was not 
provided, or that any portion of the review was performed incorrectly, 
HUD may require appropriate corrective action.

    Dated: July 2, 2010.
Milan Ozdinec,
Deputy Assistant Secretary for Office of Public Housing and Voucher 
Programs.

Appendix A--HCA's Notice of Intent To Participate

[----------, 20--]

U.S. Department of Housing and Urban Development, 451 7th Street, SW., 
Room 4232, Washington, DC 20410, By: E-mail: 
[email protected].

Re: HCA's Intent To Participate--Subsidy Layering Reviews for Proposed 
Project-Based Voucher Housing Assistance Payments Contracts

Ladies and Gentlemen:

    The undersigned, a qualified Housing Credit Agency as defined under 
Section 42 of the Internal Revenue Code of 1986, hereby notifies the 
United States Department of Housing and Urban Development that it 
intends to conduct Subsidy Layering Reviews pursuant to HUD's 
Administrative Guidelines for Proposed Section 8 Project-Based Voucher 
Housing Assistance Payments Contracts, for the purpose of ensuring that 
the combination of assistance under the Section 8 Project-Based Voucher 
Program with other Federal, State, or Local assistance does not result 
in excessive compensation. By signifying our intent to participate, the 
------------(name of agency) hereby certifies that:
    The required personnel have reviewed the above cited statutes, the 
Federal Register Notice--Administrative Guidelines: Subsidy Layering 
Reviews for Proposed Section 8 Project-Based Voucher Housing Assistance 
Payments Contracts, and 24 CFR Section 983.55.
    The agency understands its responsibilities under the above cited 
statutes and the Guidelines; the agency certifies it will perform 
subsidy layering reviews in accordance with all statutory, regulatory 
and Guideline Requirements, as well as any future HUD Notices, 
Directives, or other program information.
    By executing this Intent To Participate, the undersigned 
acknowledges that its participation will continue unless and until, the 
Department of Housing and Urban Development revokes this intent or ----
--------(name of agency) informs HUD, in writing, upon 30 days notice 
of its decision to withdraw its intent to participate.
    This Notice of Intent to Participate is hereby executed and dated 
as of the date first listed above. By executing this Notice of Intent, 
the ------------(name of agency) certifies that, upon HUD approval, the 
------------(name of agency) shall immediately assume the 
responsibility of performing subsidy layering reviews for proposed 
Section 8 Project-based Voucher Housing Assistance Payments Contracts.
    The Undersigned requests that the Department of Housing and Urban 
Development please direct all inquiries and correspondence relating to 
this Notice to:

[UNDERSIGNED NAME AND TITLE]
[STREET ADDRESS]
[CITY], [STATE] [ZIP]
    Attention of: [NAME], [TITLE]
    By Phone--[XXX-XXX-XXXX]
    By Fax--[XXX-XXX-XXXX]
    By E-mail--[e-mail address]

[NAME OF AGENCY]

By:--------------------------------------------------------------------
Name:
Title:

    The completed, signed, and dated Notice of Intent to Participate 
should be sent as a PDF attachment to an e-mail message addressed to 
Miguel Fontanez at [email protected]. The e-
mail message subject line should read ``Submission of Notice of Intent 
to Participate.''
    For questions concerning the submission and receipt of the e-mail 
please call (202) 708-2934.

Appendix B--HCA Certification

    For purposes of the provision of Section 8 Project Based Voucher 
Assistance authorized pursuant to 42 U.S.C. 8(o)(13), pursuant to 
section 2835(a)(1)(M)(i) of the Housing and Economic Recovery Act of 
2008 (HERA), Section 102 of the Department of Housing and Urban 
Development Reform Act of 1989, and in accordance with HUD's 
Administrative Guidelines, all of which address the prevention of 
excess governmental subsidy, I hereby certify that the Section 8 
project-based voucher assistance provided by the United States 
Department of Housing and Urban Development to ----------------, 
located in ----------------, is not more than is necessary to provide 
affordable housing after taking into account other government 
assistance.
-----------------------------------------------------------------------
Name of HCA

-----------------------------------------------------------------------
Printed Name of Authorized HCA Certifying Official

-----------------------------------------------------------------------
Signature of Authorized HCA Certifying Official

-----------------------------------------------------------------------
Date

Appendix C--HUD Form 2880

BILLING CODE 4210-67-P

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[[Page 39571]]



Appendix D--Documents To Be Submitted by the PHA to the Applicable HCA 
or HUD Headquarters for Subsidy Layering Reviews

    1. Narrative description of the project. This should include the 
total number of units, including bedroom distribution. If only a 
portion of the units will receive project-based voucher assistance, 
this information is needed for both the project as a whole, and for the 
assisted portion.
    2. Sources and Uses of Funds Statement
    Sources: List each source separately, indicate whether loan, grant, 
syndication proceeds, contributed equity, etc. Sources should generally 
include only permanent financing. If interim financing or a 
construction loan will be utilized, details should be included in a 
narrative (item 3 below).
    Uses: Should be detailed. Do not use broad categories such as 
``soft costs.'' Acquisition costs should distinguish the purchase price 
from related costs such as appraisal, survey, titled and recording, and 
related legal fees. Construction and rehabilitation should include 
builder's profit and overhead as separate items.
    3. Narrative describing details of each funding source. For loans, 
details should include principle, interest rate, amortization, term, 
and any accrual, deferral, balloon or forgiveness provisions. If a 
lender, grantor, or syndicator is imposing reserve or escrow 
requirements, details should be included in the narrative. If a lender 
will receive a portion of the net cash flow, either as additional debt 
service or in addition to debt service, this should be disclosed in the 
narrative.
    4. Commitment Letters from lenders or other funding sources 
evidencing their commitment to provide funding to the project and 
disclosing significant terms. Loan agreements and grant agreements are 
sufficient to meet this requirement.
    5. Appraisal Report. The appraisal should establish the ``as is'' 
value of the property, before construction or rehabilitation, and 
without consideration of any financial implications of tax credits or 
project-based voucher assistance.
    An appraisal establishing value after the property is built or 
rehabilitated is not acceptable unless it also includes an ``as is'' 
valuation.
    6. Stabilized Operating Proforma. Should include projected rental, 
commercial, and miscellaneous income, vacancy loss, operating expenses, 
debt service, reserve contributions and cash flow.
    The analysis must be projected over a 15 year period. Income and 
expenses must be trended at -------- percent.
    7. Tax Credit Allocation Letter. Issued by the State tax credit 
allocation agency, this letter advises the developer of the amount of 
LIHTCs reserved for the project.
    8. Historic Tax Credits. Some projects in designated historical 
districts may receive an additional one time historic tax credit. When 
applicable, the amount of the historic tax credit should be disclosed.
    9. Equity Contribution Schedule. If equity contributed to the 
project will be paid in installments over time, a schedule should be 
provided showing the amount and timing of planned contributions.
    10. Bridge Loans. If the financing plan includes a bridge loan so 
that proceeds can be paid up front when equity contributions are 
planned over an extended period, appropriate details should be 
provided.
    11. Standard disclosure and perjury statement
    12. Identity of Interest Statement
    13. PHA commitment letter for project-based voucher assistance
    14. Proposed project-based voucher gross rent amounts

[[Page 39572]]

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BILLING CODE 4210-67-C

Appendix F--Sources and Uses Statement (Sample Format)

SOURCES

Debt Sources

Mortgage--
Loans--
Other Loans (specify)--
Other (Specify)--

Equity Sources

Grants available for project uses--
Estimated Net Syndication Proceeds--
Additional Owner Equity Necessary \1\--
---------------------------------------------------------------------------

    \1\ This line may be used for the additional amount needed from 
the owner to balance sources against uses when no additional monies 
are available from other sources.
---------------------------------------------------------------------------

Other Equity Sources (specify)
Total Sources $------------

[[Page 39573]]

Project Uses

Mortgage Replacement Cost Uses--
Total Land Improvements--
Total Structures--
General Requirements--
Builder's General Overhead--
Builder's Profit \2\--
---------------------------------------------------------------------------

    \2\ Builder's Profit for non-Identity-of-Interest cases (a SPRA 
allowance may also be added below). See also Standard 1 
safe harbor and ceiling standard alternatives before completing. The 
Mortgage Use lines relating to Builder's Profit and Developer's Fee 
may be left blank if alternative funding standards are used, and the 
amounts are reflected below.
---------------------------------------------------------------------------

Architects' Fees--
Bond Premium--
Other Fees--
Construction interest--
Taxes--
Examination Fee--
Inspection Fee--
Financing Fee--
FNMA/GNMA Fee--
Title & Recording--
Legal--
Organization--
Cost Certification Fee--
Contingency Reserve (Sub Rehab)--
BSPRA/SPRA (if applicable)--
Acquisition Costs--

Subtotal Mortgageable Replacement Cost Uses $------

Non-Mortgage Uses

(i.e. Uses Payable by Sources Other than the Mortgage) \3\
---------------------------------------------------------------------------

    \3\ Note that syndication expenses are included below in the 
estimation of Net tax credit proceeds for this Statement, and 
therefore, are not included within this Statement.
---------------------------------------------------------------------------

Working Capital Reserve or \4\--
---------------------------------------------------------------------------

    \4\ Only Letter of Credit Costs may be included if the reserve 
is funded by a Letter of Credit.
---------------------------------------------------------------------------

Operating Deficit Reserve \5\--
---------------------------------------------------------------------------

    \5\ Indicate the full cash reserve amount if funded by LIHTC 
proceeds. Indicate only the costs of obtaining a Letter of Credit 
for the reserve if funded by a Letter of Credit at initial closing.
---------------------------------------------------------------------------

Subtotal Non-Mortgageable Uses $------

Total Project Uses $------

Estimated Net Syndication Proceeds

    The HCA may use this format before completing the Net Syndication 
Proceeds estimate line above on the Sources and Uses Statement, and 
must use this format to reflect final allocation determination 
assumptions.

Total Tax Credit Allocation-$------
Estimated Gross Syndication Proceeds-$------
Syndication Expenses:
Accountant's Fee-$------
Syndicator's Fee-$------
Attorney's Fee \6\-$------
---------------------------------------------------------------------------

    \6\ Such fees may not duplicate legal nor title work charges 
already recognized. Therefore, only fees associated with the 
additional legal service associated with LIHTC projects should be 
recognized here by the HCA.
---------------------------------------------------------------------------

HCA Fee-$------
Organizational Expense \7\-$------
---------------------------------------------------------------------------

    \7\ Such expenses may not include Organizational expenses which 
are already included, and should not be duplicated. Therefore, only 
extraordinary organizational expenses incurred because of the 
additional LIHTC-associated application preparation activities 
should be included here.
---------------------------------------------------------------------------

Other (Specify)-$------
Subtotal Syndication Expenses-$------ \8\
---------------------------------------------------------------------------

    \8\ See Guideline Standard 3 for separate safe harbor 
and ceiling limitations for private and public offerings.
---------------------------------------------------------------------------

Bridge Loan Costs less Interest (if applicable)-$------
Adjustment for Early and Late Installments (See Glossary, Net 
Syndication Proceeds Estimate for adjustment explanation)-$------
Total Reductions from Gross-$------
Estimated Net Syndication Proceeds-$------
[FR Doc. 2010-16827 Filed 7-8-10; 8:45 am]
BILLING CODE 4210-67-P