Treasury Updates Guidance, Easing the Use of Funds for Affordable Housing Development

The U.S. Department of Treasury (Treasury) recently updated guidance on the American Rescue Plan Act's (ARPA) State and Local Fiscal Recovery Funds (SLFRF) and Emergency Rental Assistance 2 (ERA2) programs. This guidance will facilitate the use of these two funding sources for affordable housing construction and preservation at a time when rising costs and interest rates continue to present challenges for financial feasibility.

SLFRF Update

The ARPA provided states and local jurisdictions with $350 billion in SLFRF to support their response to and recovery from the COVID-19 public health emergency. While affordable housing was an allowable use of SLFRF, the Final Rule governing SLFRF that took effect April 1, 2022, failed to maximize the use of SLFRF as a source for financing affordable housing development by essentially not allowing SLFRF to be used as loan principal if the loan would be repaid after 2026. The issue was that ARPA required the SLFRF to be expended by December 31, 2026, meaning the funds needed to be spent on an expense by December 31, 2026. Only the cost of the loan (interest, origination fees) would be considered an expense and the loan principal would not be considered an expense because the funds would be repaid. On July 27, 2022, Treasury resolved this issue by releasing updated guidance, through updated Frequently Asked Questions (FAQs) and a joint Treasury/HUD-issued How-to-Guide, that allows the cost of the loan and the loan principal to be considered expended at the time of disbursement to the borrower and that repayments of these loans would not be subject to the program income rules.

The July 27, 2022, guidance also expanded housing programs that are presumptively eligible to use SLFRF with the stated purpose of enhancing the "administrability and clarity" of using SLFRF funds for affordable housing. Originally, the National Housing Trust Fund (HTF) and HOME Investment Partnerships Program were the only presumptively eligible programs. The updated guidance considers all of the follow programs as presumptively eligible for SLFRF:

• National Housing Trust Fund (HTF);
• HOME Investment Partnerships Program (HOME);
• Low-Income Housing Credit (LIHTC);
• Public Housing Capital Fund;
• Section 202 Supportive Housing for the Elderly Program;
• Section 811 Supportive Housing for Persons with Disabilities Program;
• Project-Based Rental Assistance;
• Multifamily Preservation & Revitalization Program; and
• Affordable housing projects provided by a Tribal government if they would be eligible for funding under the Indian Housing Block Grant program, the Indian Community Development Block Grant program, or the Bureau of Indian Affairs Housing Improvement Program.

Additionally, the use of SLFRF will be considered presumptively eligible if the affordable rental housing units serve households at or below 65 percent of area median income (AMI) for an affordability period of at least 20 years. Therefore, in order to achieve the minimum period of affordability, a SLFRF loan used in conjunction with LIHTC would require the waiver of the qualified contract right. For mixed-income housing, under this presumption, the amount of SLFRF funds that may be used as a percentage of the total financing is equal to the percentage of total development costs attributable to such income-restricted units.

ERA2 Update

ARPA awarded states and local jurisdictions $21.55 billion to assist households unable to pay their rent or utilities due to the impact of the pandemic. These funds were in addition to $25 billion from the fiscal year 2021 Appropriations Act. The $25 billion program is known as ERA1 and the $21.55 billion program is known as ERA2. The updated Treasury guidance is specific to ERA2 funds and does not impact ERA1 funds.

The statute authorizing ERA2 provided that after October 1, 2022, unobligated ERA2 funds may be used for "affordable rental housing and eviction prevention purposes, as defined by the Secretary, serving very low-income families." The statute also required that the grantee must have obligated at least 75 percent of its allocated ERA2 funds before using them for additional purposes. The recently updated Treasury FAQ on the Emergency Rental Assistance program provides the Secretary's definition of "affordable rental housing and eviction prevention purposes." "Affordable rental housing" purposes are defined as "the construction, rehabilitation, or preservation of affordable rental housing projects serving very low-income families; and the operation of affordable rental housing projects serving very low-income families that were constructed, rehabilitated, or preserved using ERA2 funds." Transitional housing and emergency shelters are not considered affordable rental housing projects and are therefore not eligible for funding. The funds must be used to house very low-income households, defined as earning no more than 50 percent of AMI, and this affordability requirement must be in place for at least 20 years. Additionally, to be eligible, the affordable rental housing projects must meet the program requirements of one or more of the following affordable housing programs:

• Low-Income Housing Tax Credit (Treasury);
• HOME Investment Partnerships Program (U.S. Department of Housing and Urban Development (HUD));
• HOME-ARP Program (HUD);
• Housing Trust Fund Program (HUD);
• Public Housing Capital Fund (HUD);
• Indian Housing Block Grant Program (HUD);
• Section 202 Supportive Housing for the Elderly (HUD);
• Section 811 Supportive Housing for Persons with Disabilities (HUD);
• Farm Labor Housing Direct Loans and Grants (U.S. Department of Agriculture (USDA)); or
• Multifamily Preservation and Revitalization Program (USDA).

"Eviction prevention purposes" are defined as housing stability services that serve very low-income households. Housing stability services are programs that enable households to maintain or obtain housing and may include:

• eviction prevention and eviction diversion programs;
• mediation between landlords and tenants;
• housing counseling;
• fair housing counseling;
• housing navigators that help households access ERA programs or find housing;
• case management related to housing stability;
• housing-related services for survivors of domestic abuse or human trafficking;
• legal services or attorney's fees related to eviction proceedings and maintaining housing stability; and
• specialized services for individuals with disabilities or seniors that support their ability to access or maintain housing.

Conclusion

The SLFRF and ERA2 updated Treasury guidance opens the door to additional affordable housing resources that can be used in a streamlined manner. Though program nuances remain, affordable housing developers now may more easily partner with the state and local jurisdictions that were allocated SLFRF and ERA2 funds to bridge gaps in project financing. Ballard Spahr will continue to track these important and critical program funding resources and can assist in structuring these resources in current and upcoming projects. If you have questions, feel free to contact Georgi Banna at [email protected].

Ballard Spahr is a national leader working at the forefront of the legal and business elements of affordable housing and community development. Our attorneys ensure that clients get the most benefit from transactions and help navigate shifts in the market, regulatory obligations, and government incentive programs. Please reach out if you have questions or visit us at the Affordable Housing and Community Development web page.