Capital Needs Assessment. Participating Offices: Treasury-IRS, USDA-RD, HUD-MF, HUD-PIH, HUD-CPD, HUD-OSHC

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1 Lead Agency: HUD Capital Needs Assessment Participating Offices: Treasury-IRS, USDA-RD, HUD-MF, HUD-PIH, HUD-CPD, HUD-OSHC Prepared by: Ted Tn, HUD, and Meghan Walsh, USDA Issue Statement: Federal agencies and prgrams currently have different requirements fr what cnstitutes a valid Capital Needs Assessment (CNA). While sme f these differences are necessary cnsequences f using CNAs fr different purpses, administrative alignment f minimum requirements and standards f CNAs acrss Federal rental husing prgrams will help avid duplicative studies if wners and develpers intrduce a new Federal funding surce t the prject. In additin t CNAs cmpleted fr a specific actin r transactin, sme CNAs are cmpleted fr prperty and prtfli assessment, lng-term capital planning, and asset management purpses, which translate int a different verall scpe. Minimum qualificatins fr prviders f CNAs are incnsistent acrss agencies and prgrams, and in sme cases, are nn-existent. Finally, CNAs tday generally d nt capture utility cnsumptin data that wuld allw measurement, benchmarking, and establishment f baselines. Prpsed Alignment(s): Alignment(s) summary: The participating Federal agencies will direct and prcure the develpment and implementatin f a new, single CNA template tl fr use by Federal and State agencies that administer rental husing prgram funds that require CNAs. The CNA template will include the actual CNA assessment tl, prtcls fr its use, reprting requirements, and minimum prfessinal qualificatins fr the prviders perfrming the CNA reviews. The CNA template will include a traditinal, cmprehensive prperty evaluatin, an assessment f green building and energy efficiency needs and pprtunities, and a utility data cllectin cmpnent. HUD and USDA will adpt the CNA template as the standard required prtcl fr all prgrams currently utilizing r requiring CNAs, while Treasury/IRS will share the CNA prtcls and template tl as a best practice with State Husing Finance Agencies (HFAs) that administer LIHTC, thrugh the Natinal Cuncil f State Husing Agencies (NCSHA), fr ptential use by HFAs in administratin f their prgrams. These recmmendatins are based n a detailed assessment f the requirements, standards, and cmpnents f several CNAs currently in use by the participating agencies and sme majr lenders, as well as a review f a NCSHA reprt n CNA recmmended practices fr State LIHTC prviders. The CNA team s utreach effrts n this alignment initiative have received verwhelmingly psitive feedback frm subject matter experts and stakehlders, including prperty wners and wner assciatins, lenders, State administratrs, and CNA prviders. Specific actins t effect alignment: Tw primary actins will mst effectively advance the CNA alignment effrt: 1. Creatin f a single CNA template tl fr use by entities that administer Federal rental husing funds, in the frm f an electrnic mdel (e.g., Micrsft Excel wrkbk, web-based sftware applicatin, Oracle applicatin, r ther [TBD]) designed t allw husing develpers and agency users t access

2 pages in the template that are specific t funding surces r prgrams. Upn pening the template and selecting the agency r prgram that is requiring the CNA, the template will shw the pages apprpriate t that prgram and the level f CNA review and analysis required fr that prgram. This single template CNA tl will include: An assessment f all building systems, cmpnents, and elements t determine current needs and a standard 20-year prjectin f physical needs. A data cllectin page t recrd (ften fr the first time) infrmatin critical t effrts t benchmark perfrmance fr prperties relative t their peers, in rder t establish baselines fr measurement f future perfrmance. Data cllectin pints and prtcls will be cnsistent with industry-accepted standards, and will include utility cnfiguratin ptins (wh pays fr which utilities), fuel surces and csts, water and sewer csts and respnsibilities, and whle-building utility cnsumptin data, nrmalized fr weather and ccupancy variances. Tw levels f review and analysis. Agencies wuld require the assessment level mst apprpriate t fulfill the needs f the applicable prgram. Level 1: Agency prgrams using the CNA fr asset management purpses, capital needs assessments, prtfli reviews, and purpses ther than specific rehabilitatin planning, will presumably require the Level 1 CNA review. Level 1 will be less expensive than Level 2 t cmplete, and will have less actin-riented recmmendatins than a Level 2 analysis, but wuld include the primary elements f energy efficiency, green building, and life cycle analysis t facilitate infrmed future decisin making abut underlying prperties. Level 2: In general, prgrams using the CNA t supprt prperty develpment, rehabilitatin, refinancing and repsitining, lng-term capitalizatin and capital planning, and energy efficiency and green building retrfits, will presumably use Level 2, which wuld be the mst rigrus level f CNA review and analysis. Tw CNA standards in use tday illustrate the apprximate scpe f review prpsed fr Level 2 f the new CNA template the Enterprise Green Cmmunities prgram CNA prtcls and the HUD Recvery Act/Green Retrfit Prgram CNA mdel. The CNA template will build in life cycle cst analysis fr all CNAs t allw users t cnsider these attributes when determining the size f reserve accunts and t assist in investment decisins that may result in reducing utility csts ging frward. The standard template CNA will include built-in analytics and lgic mdels t enable the tl t make recmmendatins abut the mst cst-effective slutins t needs identified thrugh the assessment. These analytics wuld include: Cst-benefit /payback analyses Early replacement analyses

3 Cradle t grave review f materials and cmpnents, t the extent pssible and as this infrmatin becmes mre widely available Other envirnmental benefits f systems and cmpnents, such as indr air quality benefits, recycled cntent, recyclability, durability/useful life, etc Origin f materials and lcal surcing It is imprtant t nte that while the CNA template will include the sphisticated analytics and lgic t develp recmmendatins (as described abve): All recmmendatins made by the tl can be manually verridden by the user, fr any number f reasns (i.e., cst cnstraints, availability f materials, physical cnstraints, etc). A built-in audit functin will allw the user t view an inventry f verridden fields. The CNA review may identify a need fr further supplemental, specialized assessments such as lead-based paint testing, an ADA accessibility study, asbests review, feasibility testing fr sme alternative energy installatins, undergrund strage tank testing, etc. The CNA itself will nt include these specialized assessments, but will include flags t alert the CNA prvider t the ptential need fr further studies, either because f the funding surce requirements r because prperty characteristics warrant further study. The template CNA will assess and reprt n the physical needs and pprtunities at the subject prperty, but will nt require any wrk t be cmpleted. Any requirements fr actin t be taken based n the CNA reprt will be driven slely by the agency and/r prgram utilizing the tl. In ther wrds, the CNA tl prvides the assessment but the agency/prgram applies its rules t the use f the CNA tl and the actins that may be required t address the assessment. Any agency using the template CNA can exercise its discretin t waive r mdify the CNA requirements fr very small prperties, where the cst f assessment wuld be prhibitive. The CNA may include a link between the CNA template and an nline industry surce fr accurate and current cnstructin cst data and estimated useful life (EUL) tables fr materials and building systems that will be maintained and updated n an annual basis, t imprve the accuracy and cnsistency f CNAs acrss all users. It may als be pssible t retain an utside cntractr t link the CNA template t accurate and current cnstructin cst data, and t maintain this data n an annual basis. This wuld greatly imprve the accuracy f CNAs acrss the cuntry. Further adaptatin f these standards by the agencies culd be additive but presumably nt be subtractive, i.e., the minimum assessment standards wuld apply in all cases, but sme agencies r prgrams may layer additinal requirements beynd the CNA review.

4 Capital Needs Assessment Tl and the HUD-PIH Physical Needs Assessment Tl Currently, HUD-PIH is wrking n the develpment f a Physical Needs Assessment (PNA) tl which will be used by Public Husing Authrities (PHAs) fr capital planning. The HUD-PIH capital planning PNA is being created based n a CNA cnstructed by HUD-MF s Office f Affrdable Husing Prgrams (OAHP) fr its Green Retrfit prgram. Pilt testing slated fr the summer f 2011, and rll ut t all PHAs in The HUD-PIH PNA is anticipated t be very clsely aligned with the CNA. The majr difference between the tw prducts relates t the level f cmplexity and assciated burden, and the level f cntrl the agency has in the prcess. The HUD-PIH PNA will be cmpleted by PHAs every five years and updated annually by ver 3,100 PHAs, including sme 2,100 small PHAs. Hwever, the CNA tl is intended t be transactinal, and thus wuld be undertaken by a much smaller subset f entities much less frequently, ptentially nly nce every 15 r 20 years. PHAs wuld nly infrequently use the CNA tl fr capital planning as the level f sphisticatin and cmplexity assciated with it wuld be greater than with the PNA. It shuld be nted hwever that the CNA prtcl wuld apply t HUD-PIH transactinal prgrams (such as Chice Neighbrhds r Public Husing Capital Grants) that typically require CNAs. Majr recapitalizatin and substantial rehabilitatin events generally require brrwers t meet a higher standard t justify the lng term cmmitments implicit in the financing. CNA training Develpment and adptin f a single CNA template tl will require a rbust training and implementatin cmpnent fr users. This training will include, at a minimum, a cmprehensive user guide, in-persn training fr respective agency staff, reginal in-persn training fr CNA prviders and ther stakehlders, and a webinar (r ptentially multiple webinars targeting varius stakehlder audiences) cnducted jintly by the agencies and the cntractr respnsible fr develpment f the template, as part f its verall engagement. This webinar training will cntinue t be available natinally, and archived fr future use by anyne, accessible n the respective agencies websites. CNA prviders using existing CNA templates have emphasized the critical need fr training and technical assistance, as the learning curve fr a new tl and prtcl (even fr experienced prviders) can be steep. Additinally, the presumed streamlining savings anticipated are dependent upn up-frnt training. 2. In cnjunctin with the new CNA template tl, the team prpses develpment f a minimum prfessinal qualificatin standard fr prviders f CNAs, t ensure that prviders have the experience and ability t assess the capital needs f rental husing prperties. The CNA template prpsed is mre in depth than sme CNA prtcls in use tday, including the energy audits/assessments, life cycle cst analysis, and accessibility standards cmpnents, each f which requires specific knwledge and experience. It is critical that the new CNAs are cmpleted by prfessinals capable in these areas s that assessments are crrect and usable. The cmmn qualificatin standard will likely reference

5 and accept any number f bradly available industry qualificatins, standards, certificatins, r accreditatins. Resurce Estimate fr Implementatin: Based n CNA team research int the resurce requirements t develp ther CNAs currently in use by ther parties, the team estimates that the ttal cst t design, develp, implement, prvide training n, and maintain the CNA template tl wuld be apprximately $1 millin - $1.5 millin. This estimate includes prcurement, design, develpment, testing, training develpment, training delivery, implementatin and rll ut f the CNA electrnic tl, and assciated prtcls, user guide, and training materials. This ttal cst breaks dwn apprximately as: CNA design and develpment: $0.8 - $1.25 millin. This estimate assumes that ne r mre f the existing CNA templates can be used as a basis fr design and develpment Implementatin, training, technical assistance, user guide develpment: $ $0.5 millin It is critical that the full range f activities assciated with the initiative is funded tgether. This investment is recmmended t be a shared cst between tw f the Rental Plicy Wrking Grup lead agencies. HUD, as the mst intensive user f CNAs, will assume the largest share f cst, with USDA assuming part f the respnsibility cmmensurate with demand. Because Treasury wrks t prvide guidance t State HFAs, but des nt therwise prvide resurces with which State HFAs are t administer the LIHTC prgram, Treasury/IRS may issue guidance related t the CNA tl but will nt require HFAs t make the new CNA a required cmpnent f HFAs allcatin prcess and will nt cntribute t csts f develpment. This initiative includes elements f Infrmatin Technlgy, Technical Assistance, and Transfrmatin, and the team recmmends pling resurces frm each f these areas in the respective Agencies. This resurce allcatin is a strategic investment in a tl and prtcl that will streamline peratins, and save cnsiderable Agency and stakehlder resurces in the lng run. Estimated cst savings fr wners, peratrs, develpers, investrs and/r lenders: Cst savings are anticipated as prviders f CNAs gain familiarity with the standardized requirements f CNAs acrss agencies. While difficult t estimate, the standardized CNA template tl culd cnservatively be expected t save 10-20% n the cst f an average, cmparable CNA assessment and reprt, primarily due t the efficiencies f a standardized assessment apprach. CNA prviders, regardless f agency, prgram, r lcatin f the prperty (depending n which State LIHTC administratrs adpt the standard CNA), will be familiar with the tl, prtcls, and expectatins f the assessment. Streamlining fr prviders shuld result in reduced csts t the cnsumers f the reprts, i.e. the wners, develpers, lenders, and/r investrs. A back-f the envelpe estimate f ptential savings assumes apprximately 3,000 CNAs are perfrmed per year in the varius HUD, USDA, and LIHTC refinance and/r rehab prgrams assisted r subsidized prperties. At an average cst f $10,000, and a cnservative, average assumed efficiency savings frm using this new CNA template f 10%, annual savings frm this alignment will be (3,000 x $10,000 x 10% =) $3 millin. The CNA tl will include, as described, cst/benefit analyses and life cycle cst analyses, infrming investment decisins in cmpnents and technlgies that will result in measurable savings generated

6 frm utility and water efficiency savings. These savings may accrue t the wners, investrs, lenders, agencies, and/r residents, depending upn utility cnfiguratin, subsidy structure, etc. Savings t stakehlders will als result frm the eliminatin f the need fr duplicate CNAs n the same transactin. Fr example, a prperty currently may need t meet ne CNA standard fr an agency (HUD r USDA) and anther standard fr the State administratr f LIHTCs, requiring tw similar but distinct CNAs t be prduced. Additinally, equity investrs and lenders may cntinue t require their wn independent CNAs. Prperties subject t multiple prgram requirements acrss multiple agencies may similarly be required t prduce (and pay fr) multiple CNAs t satisfy each agencies unique requirements. Estimated cst savings fr State, lcal, and Federal gvernments: The single CNA template will simplify future crdinatin and updates t all f the agencies CNAs, as regulatins and requirements change, energy efficiency advancements are made, and new cmpnents and technlgies becme available, all f which will affect the rental husing industry and will be reflected in future versins f the CNA tl. Currently, HUD and USDA hire utside cntractrs t separately develp, update, and maintain these varius templates. These csts average mre than $1 millin per year. When there is nly ne standard template, there will be savings by reducing verlaps in wrk between agencies t keep templates updated. The CNA tl will include, as described, cst/benefit analyses and life cycle cst analyses, infrming investment decisins in cmpnents and technlgies that will result in measurable savings generated frm utility and water efficiency savings. These savings, while difficult t estimate, shuld equate t tens f millins f dllars per year in the near term; HUD and USDA alne spend in excess f $6 billin annually n utilities in sme frm (i.e., tenant utility allwances, inclusive rents, budget-based perating subsidies, etc). CNAs that drive wners and investrs t make efficiency investments that result in very mdest utility savings f 10-20% will generate millins in savings in a very shrt time. (These savings are very achievable: EnergyStar requires a standard that is 15% mre efficient than lcal cde, and experience in sme HUD retrfit prgrams has shwn that 20% savings are readily realized with mdest investment.) The lng-term gal is t utilize a CNA that includes an energy audit cmpnent, as recmmended here, t make the agencies prtflis much mre efficient and affrdable ver time. The agency prgram administratrs that utilize the CNA reprts and recmmendatins t supprt prgrams will benefit thrugh saved staff time by having a standardized tl; currently, the lack f a standard frmat fr presentatin f CNA findings and recmmendatins result in a great deal f back-andfrth between the agency staff and the CNA prvider. A standard tl with a clear and explicit prtcl fr reprting and n which all parties are trained will greatly reduce the time and effrt t successfully cmplete a prperty assessment. Finally, the CNA tl, if linked t cst-estimating sftware r data, will save agency time and mney (as well as wner/investr time and mney) thrugh mre accurate and timelier cst estimating and capital planning than can be perfrmed currently. Schedule fr Alignment Implementatin: The ttal develpment and implementatin time fr the single, multi-agency CNA template is estimated t be 24 mnths. Thus includes:

7 Develpment f specificatins and scpe f wrk: 3 mnths Prcurement f services: 3 mnths Majr Milestne at 6 mnths: Cntract prcured/cntractr selected fr develpment f CNA Design and drafting f detailed template functinality and interface specificatins with selected cntractr: 4 mnths Develpment f beta versin f template tl: 4 mnths Majr Milestne at 14 mnths: Beta tl develped fr testing Testing, revisins, finalizatin f template tl: 3 mnths Limited release fr final testing: 2 mnths Creatin f user guide, training materials, n-line training sessins, technical assistance materials, etc: 3 mnths (cncurrent) Finalizatin f template tl: 1 mnth Majr Milestne at 21 mnths: Final tl and training materials released; training begins Public release f final CNA template tl, training fr agency staff, CNA prviders: 3 mnths (and nging via n-line training materials) Majr Milestne at 24 mnths: First rund f training fr agency staff and CNA prviders cmpleted, archived webinars and training materials available fr public use It is recmmended that participating agencies adpt the CNA template fr all prgrams requiring the use f a CNA within six mnths f public release f the template. Challenges t effecting prpsed alignment(s): Stakehlders have raised cncerns that a CNA template and prtcl that invlves mre rigrus review and reprting requirement than may currently be required, such as the additin f an energy audit cmpnent, will lead t increased csts per CNA. 1 These are legitimate cncerns, as sme agency prgrams that cnvert t the new template CNA will increase the rigr f the review and likely the cst t have a review perfrmed. Hwever, any increase in the rigr f CNA requirements are mst likely cming regardless f this alignment initiative. In fact, the aligned CNA template shuld minimize the cst increases because f the cst-reducing effects f standardizatin. As detailed abve, many prgrams CNAs shuld fall in cst due t the alignment. A related cst cncern raised by stakehlders is that establishing minimum prfessinal qualificatins and training requirements fr the prfessinals perfrming CNAs culd, at least in the shrt term, increase the cst f finding a qualified prfessinal t perfrm the CNA, particularly in rural areas and fr wners that perfrm CNAs using internal staff wh may r may nt meet the aligned qualificatin requirements. While the develpment f cmmn CNA prvider qualificatins prmtes useful and prper CNA assessments, the enactment f such minimum qualificatins r certificatins may lead t an increase in the cst f 1 The savings frm efficiencies estimated abve are savings ver a similar-scpe CNA.

8 prviding/attaining a CNA, at least initially until the market catches up t the qualificatin standard.these challenges are believed t be shrt term, as the prvider industry gets up t speed n qualificatins, and that this ptential cst increase is mre than ffset by the savings resulting frm standardizatin. The use f CNAs t meet the requirements f the varius agencies and prgram ffices varies greatly. The develpment f each f the primary frms f CNAs in use r develpment by the respective agencies tday has been a lengthy and expensive prcess, invlving cnsiderable cntract dllars and internal agency resurces t guide the develpment and implementatin f the tl. Mdificatins recmmended thrugh this alignment prcess, if adpted, may result in time-intensive and cstly changes t guidance, sftware, training, and rll-ut, which culd render their implementatin challenging. Fr example, many public husing authrities (PHAs) have a CNA system in place, either internally r thrugh a third party prvider. Sme f these third party arrangements invlve an nging cntractual relatinship fr maintenance f the database created thrugh the CNA. Sme f these databases are further integrated int the PHAs ther internal perating systems. Further, many PHAs perfrm the CNA activity fr strategic planning with qualified in-huse staff; a prfessinal qualificatin requirement, if greater than tday s requirements, wuld ptentially frce PHAs t bear the expense f third party prviders r f extensive re-training fr their staff t btain prfessinal certificatin. Anther example cmes frm the green CNA develped t supprt HUD s Green Retrfit Prgram; the tl was develped using an existing HUD CNA tl as the baseline, and cnsiderable time and cntract dllars t develp, test, train, and implement the tl. That CNA tl is designed t supprt a specific prgram, in that the results f the CNA are autmatically electrnically linked int the financial underwriting mdel used t supprt award decisins, lan and grant sizing, and lan cmmittee reviews. The develpment f a single CNA template capable f supprting the specific requirements and nuances f each f the applicatin templates, with the functinality t allw the user t select the agency and prgram and have the apprpriate screens appear, wuld in itself be a cnsiderable undertaking in terms f agency resurces, as described abve. Once created and tested, there will be a cnsiderable cmmitment f time and resurces t then prvide training and supprt t the varius stakehlders in becming familiar with the tl. There will be an nging need fr maintenance and updating the tl, and technical supprt t the users f the tl. On the ther hand, nce in place, this template CNA tl will be easier t maintain and update with newer, mre accurate infrmatin than multiple CNAs between agencies. With an increased emphasis n energy efficiency in rental husing, energy subsidies wuld crrespndingly be reduced as well. Despite these challenges, it is the team s cllective recmmendatin that this undertaking is a strategic investment in a tl and prtcl that will streamline peratins and save cnsiderable agency and stakehlder resurces in the lng run.

9 Purpse This dcument is part f an nging effrt t better align Federal rental plicy acrss the Administratin and is spnsred by the Rental Plicy Wrking Grup. The Rental Plicy Wrking Grup is cmpsed f the White Huse Dmestic Plicy Cuncil (DPC), Natinal Ecnmic Cuncil (NEC), Office f Management and Budget (OMB), and the U.S. Departments f Husing and Urban Develpment (HUD), Agriculture (USDA), and Treasury. The specific areas f cncern identified herein emerged frm July 2010 stakehlders gathering at the White Huse n areas f Federal rental plicy incnsistency acrss the administratin. The revised cnceptual prpsals fr alignment articulated within this reprt are preliminary in nature and have nt been endrsed by any Federal agency r ffice. With any questins, please cntact the Rental Plicy Wrking Grup Agency Alignment Leads: Larry Andersn, Directr f Multi-Family Husing Preservatin and Direct Lans at USDA-Rural Develpment, Ben Metcalf, Senir Advisr at HUD s Office f Multifamily Husing Prgrams; r Michael Nvey, Assciate Tax Legislative Cunsel in Treasury s Office f Tax Plicy.