September 16, 2011 Community Planning and Policy Alert! Guidance on Allocating Real Estate s in the Neighborhood Stabilization Program Originally released January 13, 2011; updated September 16, 2011 Introduction Neighborhood Stabilization Program () grantees may work with developers, subrecipients, contractors, or any combination of these entities to implement their programs. However, different HUD and OMB rules regarding development costs apply to these entities. Accordingly, grantees must carefully consider the implications of any decision to implement -funded activities through one type of entity versus another. This guidance describes what is eligible and allowable as part of Total s, for grantees and subrecipients as well as for developers. Total s are those expenses which are integral and allocable to the design, construction, and occupancy of a real estate project. Many people sub-classify them as Hard s and Soft s, with Hard s including land and construction and Soft s including less tangible expenses such as architecture and engineering. Total s also form the basis for the potential sales price of the home and for developer s fees. Most partners understand Hard s, but some confusion remains about Soft s, especially Developers Fees. This guidance uses the term program to refer to the community s effort as a whole. Activity refers to an eligible activity category, such as housing rehabilitation or demolition. Project refers to work undertaken for a specific purpose; the term as used here refers to an individual property being built or rehabilitated or a similarly specific effort. Much of the text on this and the next page comes from a March 30, 2010 Policy Alert on administrative costs and applies to all grants. http://www.hudnsphelp.info/media/resources/%20policy%20alert_vol%201%203-24-10.pdf Additional guidance on subrecipients and developers is contained in the Policy Alert on Obligations at: http://www.hudnsphelp.info/media/resources/policyalert_obligations_4-23-10.pdf U.S. Department of Housing and Urban 1
Activity Delivery s Charges for activity delivery are limited to costs incurred in carrying out a specific -funded eligible activity. Examples of activity delivery costs are cited in the CDBG regulations. Section 570.205(a)(4)(iii) states that engineering and design costs related to a specific activity are eligible as part of the cost of such activity under 570.201-570.204. Section 570.206 notes that staff and overhead costs directly related to carrying out activities [are] eligible under 570.201 through 570.204, since those costs are eligible as part of such activities. Program Administrative s The use of funds to pay program administrative costs is authorized under 24 CFR 570.206, Program Administrative s, which permits funds to be used for "reasonable administrative costs and carrying charges related to the planning and execution of community development activities assisted in whole or in part [with 2 funds]. These administrative costs satisfy the statutory requirement for meeting a national objective because the costs are incurred in support of generally eligible program activities that individually meet a national objective. Examples of program administrative costs include: Salaries of executive officers, Office space for program staff employed in carrying out the program, Staff time spent developing policies and procedures for managing activities, and Administrative services performed under third party contracts, such as general legal and audit services. OMB Circular A-87 (governmental entities) and Circular A-122 provide the principles for determining program administrative costs. In addition, HUD s publication: Playing by the Rules A Handbook for CDBG Subrecipients on Administrative Systems will also be useful to private non-profit grantees in gaining a better understanding of requirements that apply when carrying out activities. These can be found on the Resource Exchange at www.hud.gov/nspta Allocation of s As provided under OMB Circulars A-87 and A-122, the total cost of Federal awards is composed of the allowable direct cost of the program, plus its allocable portion of allowable indirect costs, less applicable credits. There is no universal rule for classifying certain costs as either direct or indirect under every accounting system. However, each item of cost must be accorded consistent treatment in order to be an allowable charge to a Federal grant. Thus, a cost may not be assigned to a Federal award as a direct cost if any other cost incurred for the same purpose in like circumstances has been allocated to the Federal award as an indirect cost. Where the following table denotes a cost as allowable, for the allocable portion, it means that such costs must be documented by the grantee, subrecipient, or for overhead, by the developer, as complying with the applicable cost principles. A cost is allocable to a particular cost objective, such as a grant, contract, project, service, or other activity, in accordance with the relative benefits received. U.S. Department of Housing and Urban 2
Direct costs Direct costs payable with funds are those that can be identified specifically with the grant. Typical direct costs chargeable to grants are shown on the large table below, including predevelopment, development, and post-development cost elements. The table shows that direct costs are accounted for in the same way by all entities, and should be charged to the activity line item as part of the project costs. Indirect costs In addition to the direct charges discussed above, indirect costs may be charged to the grant under an indirect cost allocation plan prepared in accordance with OMB Circular A-87 or A-122, as applicable. The ability to recover all costs, direct and indirect, is especially significant for those non-profit organizations that are accustomed to being compensated through a developer s fee. Indirect costs are those: Incurred for a common or joint purpose benefiting the grant and one or more other cost objectives (e.g., contracts, grants, or other activities), AND Not readily assignable to the cost objectives specifically benefitted, without disproportionate effort. General administration and indirect costs are shown in the tables at the end, and are different for developers than for grantees and subrecipients. Developer fees include only overhead (allocable portion) and profit. Additional discussion on developer issues follows the last table. Developer s Fees Entities may charge developer s fees only when (i) activities are carried out pursuant to 24 CFR 570.202(b)(1), which allows a grantee to provide CDBG or funds to private individuals and other entities to finance the acquisition and rehabilitation of property for use or resale for residential purposes, or (ii) funds are provided to private individuals and other entities to finance construction of new housing in connection with the redevelopment of demolished or vacant properties. The purpose of allowing the developer s fee to be included in the cost of a project is to compensate the developer for related overhead expenses and to provide a return on the developer s investment (which return may be referred to as profit for simplicity s sake). The overhead expense intended to be defrayed by the developer s fee is very similar to the General Administrative costs in the grantee budget, and may include such indirect costs as rent, utilities, and other expenses that cannot be linked to a specific project. However, no comparable allowance for profit can be included in the grantee/subrecipient budget since OMB cost principles circulars do not provide for charges to a grant that include an increment above actual cost. When negotiating a developer s fee with a third party, it is critical for the grantee/subrecipient to clearly specify what project costs can and cannot be paid with funds. Since a portion of the developer s fee is to defray overhead expenses, the development agreement should not include allowances for both the fee and items of cost that are properly classified as overhead. If the developer s fee includes an allowance for profit, the grantee/subrecipient should ensure that the return on the developer s investment is reasonable (taking into account the riskiness of the project). Grantees/subrecipients should consider the developer s total return in negotiating the profit component of the developer s fee. The developer s U.S. Department of Housing and Urban 3
return on investment will include not only the profit component of the developer s fee, but also the cash flow from operations and subsequent disposition of the property. Grantees will generally also retain a percentage of each payment to the developer. Though not required by, such a provision is used to encourage developers to complete projects in a timely manner. If a developer agreement does not include specific property addresses, then the contract should include a detailed list of criteria describing eligibility for acquisition and include a list of -related obligations that carry forward with the property. It is also advisable for grantees to retain the right to individually sign off on each acquisition by a developer. While subrecipients may not receive a developer s fee and the related profit, many projects, especially rental projects, use other financing. If an project has multiple sources of funds, the grantee, consortium member, or subrecipient may collect developers fees on the portion of the project that is not funded with dollars. For example, if the developer normally receives a 10% fee, then on a $100,000 project they would receive $10,000. If the project is 60% supported with other funds and 40% -funded, the nonprofit could receive 10% of the $60,000 ($6,000) from the other sources of funding. On the $40,000 funded portion, the nonprofit can receive all direct costs and any allowable indirect costs. However the nonprofit cannot simply charge the entire $10,000 to the non- funding. Subrecipients may, however, charge overhead costs (the other component of the developer fee besides profit.) Staff costs may be allocated based on direct salaries by keeping records of time spent by executives or other non-project staff. The federal government collects timesheets for two weeks each quarter and allocates costs based on the relative distribution of work; such sampling is acceptable. Indirect costs such as rent and utilities may also be paid with grant funds. Subrecipients must develop an indirect cost plan; the best way to accomplish this is to have the plan prepared by a Certified Public Accountant according to OMB Circular A-122. The CPA should certify that the plan complies with A-122; when the subrecipient has no other federal funds, the City or State may approve the indirect cost allocation plan. Otherwise, the subrecipient should submit it to the HUD Field Office; HUD is the cognizant agency for. For simple plans, HUD Headquarters will work with the Field Office to expedite approval. Once approved, indirect costs may be charged retroactive to the beginning of the program. U.S. Department of Housing and Urban 4
ALLOWABLE COSTS IN NEIGHBORHOOD STABILIZATION PROGRAMS WITH ACQUISITION AND REHABILITATION (OR NEW CONSTRUCTION) COST ELEMENTS Hard s shown in Italics ALLOWABLE GRANTEE OR SUBRECIPIENT COSTS ALLOWABLE DEVELOPER COSTS PRE-DEVELOPMENT PHASE for Land Acquisition, appraisal, realtor and legal fees, title insurance, recording fees etc. Demolition Expenses Environmental: Inspection, engineering, remediation, abatement Architectural, engineering, etc. DEVELOPMENT PHASE Installation of Infrastructure (Streets, Water, Sewer) of site development, including engineering, permitting and other fees attributable to the site Interest and Fees on Construction Loans Real Estate Taxes, Insurance and Property Maintenance During (taxes allowable if legally required to be paid) U.S. Department of Housing and Urban 5
Legal Fees, Recording Fees, Surveys, Platting, Testing, Engineering s and Architectural Construction materials and subcontractors Construction Staff Directly Allocable to the Project Permits, Licenses and insurance for Construction Construction Insurance, Bonding, Allocable to Project Transportation, Phones used on construction sites, Construction Supplies and Tools, Dumpster, Site Security, Other Construction and Site s Construction supervisor, Construction Staff (including salary, taxes, benefits, insurance, and related expenses) Grantee or Subrecipient staff directly involved in any phase of development. N/A N/A POST-DEVELOPMENT PHASE Marketing Expenses (e.g. advertising sale of home) Legal Recording, Title, Documentation and other Fees Associated with Sale Appraisal for Slate to Homebuyer Mortgage Origination and Servicing Set-up Fees HUD Homeownership Counseling Not applicable Not applicable All costs above for Grantees/Subrecipients are Project s, which should be charged to the budget line item, not General Administration. All costs above for Developers are Project s, which should be charged to the budget line item. These are not part of the Developer s fee. It should be clear that these are identical for all three types of entities. The following page contains the only difference. U.S. Department of Housing and Urban 6
THIS SECTION REVISED SEPT. 14, 2011 ADMINISTRATIVE COSTS FOR GRANTEES AND SUBRECIPIENTS The following costs are considered either Indirect s or GENERAL ADMINISTRATION and cannot be charged as activity delivery costs. Planning Program, Developing the Substantial Amendment (Application,) Oversight, Reporting, Evaluation, and other costs which cannot be linked to a specific project address.? Not Charged to Indirect s? Allocable portion only as part of an approved indirect cost plan.? Yes, if not as indirect then as general administrative costs.(up to 10% of the sum of grant plus any program income.) of grant compliance office ( including salary, taxes, benefits, insurance and related expenses) Not Allocable portion only as part of an approved indirect cost plan. Yes, if not as indirect then as general administrative costs.(up to 10% of the sum of grant plus any program income.) s of general administrative staff, such as Executive Director or budget staff, not directly involved in activity delivery. Not Allocable portion only as part of an approved indirect cost plan. Yes, if not as indirect then as general administrative costs.(up to 10% of the sum of grant plus any program income.) CONTRASTED WITH Grantees and subrecipients may charge activity delivery costs and administrative funds for all direct costs. Any indirect costs may only be charged to with an approved indirect cost allocation plan or with time sheets or similar documentation for employees working in general administrative duties on more than one grant or activity. See OMB Circulars and Policy Alert Dated March 30, 2010 for additional discussion OVERHEAD AND PROFIT (COVERED BY DEVELOPER S FEE) Overhead is similar to Indirect s and/or General Administration for grantees/subrecipients Profit. Should be considered together with cash flow from operations and proceeds from disposition in evaluating reasonableness. Developer s office expenses (staff, rent, utilities not attributable to a specific project.) Part of Overhead. Developer s general business expenses (accounting, legal, travel, printing, etc.) Part of Overhead A cost is allocable to a particular cost objective, such as a grant, contract, project, or other activity, in accordance with the relative benefits received. U.S. Department of Housing and Urban 7