Summary: Provide an NSP funded line of credit to nonprofit developers to acquire and rehabilitate properties.  The program would be modeled to the extent possible on how a private sector lender might make an unsubsidized line of credit available (factoring in full compliance with all NSP regulations).  When needed to make the unit affordable, a portion of the funding might be "rolled over" to provide soft second purchase loans.

Overview of the Key Concept: Prior to negotiating any purchase contracts the developer applies for revolving line of credit loan with the NSP funder. A loan agreement is entered into and the developers then begins to seek out properties. Upon execution of a puruchase contract the developer submits a disbursement request to the NSP funder accompanied by all required documentation. The request is then expeditiously approved (or dissapproved) followed by a closing on the acquisition

Loan Application Process.  Through an RFQ of RFP nonprofit developers would be invited to submit applications for the line of credit. The application procedure would require the developer to submit specified documentation. Thus, the NSP lender gets to select a pool of pre-qualified developers with which it will do business. At this stage, no documentation would be required about particular properties (that information would be submitted later as part of a disbursement request).

Loan Agreements would be executed with the nonprofit developers selected during the application process.  The Agreements would specify all of the requirements that had to be met in order for NSP funds to be disbursed.

Disbursements for Acquisition and Rehabilitation. The developer, after executing the Loan Commitment Agreement, would seek out eligible properties for purchase. A disbursement request for a particular property would be submitted to the NSP lender.  The disbursement request would contain all of the documentation required by the Loan Commitment Agreement including:

"Closing Documents" for Acquisition Disbursements:

1.  Loan Agreement

2.  Promissory Note
3.  Environmental Compliance Agreement
4.  Mortgage

These would be standardized closing documents that could be quickly adapted for each acquisition.  Provided that all of the lender's requirements had been met, the closing would take place within 14 days after a disbursement package had been submitted.

Meeting the Affordability Requirements

"Recapture" vs "Resale": The regulations governing NSP require compliance with the HOME affordability guidelines. The regulations governing the HOME program allow (but do not require) heavy handed "resale" restrictions, imposed by a recorded covenant, wherein buyers are restricted as to who they can re-sell their homes to and the price that they could ask.  An alternative (and less intrusive) "recapture" method is also authorized wherein the subsidy, under specified circumstances, is recaptured when the property is resold or improperly leased.

Local NSP programs should comply by using "recapture" mechanisms and not "resale" restrictions.  The primary objective of NSP, after all, is to stabilize neighborhoods that are in a downward spiral. It makes little sense to impose low resale prices in areas where prices are already in steep decline.

Below is an outline of how the recapture mechanism could work:

Such buildings are typically old and deteriorated.  There may not be sufficient funds to pay for the cost.  Rehabilitation is expensive and the available NSP funds probably will not be sufficient in and of themselves. 

Rents are required to be kept low due to the NSP requirements for serving people with incomes at less than 50% of the area's median income.  Because of this, there is little income to service debt on loans needed to pay for the rehabilitation work.  Beyond that, even if the cash flow was sufficient banks may still be reluctant to make loans for such ventures

Generally, this statute requires developers to pay the cost of relocating persons displaced in projects that use federal funds.  The developer acquiring the property must be able to document that all tenants in occupancy as of the date that the purchase contract was signed received the notice that is required by the statute. Learning the identity of those tenants can be tricking in a building that has undergone foreclosure. The budget for a project (already tight due to the limited amount of rental income that will be generated) must include relocation expenses necessitated by this law. Feasible acquisitions might be limited to those that are already vacant or those having enough vacant units available so that tenants could be moved around during the rehab process.

This recent law gives tenants living in foreclosed properties new rights. Locally administered NSP programs, in approving an acquisition of a foreclosed multifamily building, will prudently require documentation showing the identity of the tenants in occupancy as of the date of the foreclosure sale and proof that the required notices had been given to them

Because NSP is federal money, labors costs for the rehabilitation of projects involving more than 11 units will be increased (wages must be paid at the "prevailing" rate pursuant to the requirements of the Davis Bacon Act)

Though not necessarily required by the federal NSP regulations or the relevant building codes, local NSP programs will sometimes add cost to a project's budget by requiring the inclusion of mandatory "green" energy saving features.  This puts an additional strain on already tight rehab budgets (given the limited amount NSP funds available and the limited amount of cash flow available to pay debt service)

Under federal regulations, if the rehab costs exceed 75% of the acquisition costs the project is considered "new construction" requiring costly and time consuming environmental clearance procedures involving United States HUD.  Note: these federal regulations offer a disincentive to developers to try and bargain for a low acquisition price.

Because federal funds are involved, contractors doing the rehab are required to hire local residents (click here for more information). The requirement is typically enforced by requiring the contractors to sign a "First Source Hiring Agreement".