nsp policy alert: program income - hud exchange policy alert... · nsp policy alert! program income...

July 13, 2011 Community Planning and Development

NSP Policy Alert! Program Income in the Neighborhood Stabilization Program

Many NSP grantees will generate program income. While its use is largely regulated by rules from the CDBG program, some questions have arisen about NSP situations that are less common in the Block Grant Program. This guidance addresses some of those questions and clarifies program income policy on the distribution of Net Operating Income in rental projects.

Three appendices include: 1. Examples of NSP program income issues (p. 7); 2. Relevant regulatory citations (p. 10); and 3. Program income in DRGR (p. 15)

Definition and Examples Program income is defined as gross income received by the recipient or a subrecipient directly generated from the use of NSP or CDBG funds. The NSP Program follows the CDBG regulations on program income, which can be found in their entirety at the end of this Policy Alert. The Department's policy since 2008 is that NSP program income must be spent on NSP-eligible activities only.

Common sources of NSP program income are:

Payments of principal and interest on loans made with NSP funds;

Proceeds from the sale of properties acquired and/or improved with NSP funds;

Recapture of NSP subsidies if an assisted home is sold before the end of the affordability period;

Interest earned on program income pending its disposition;

Repayments of liens placed on privately owned property that was demolished using NSP money;

Gross income from the use or rental of real property constructed or improved with NSP funds, less the costs incidental to the generation of that income.

The following revenues are NOT program income:

Proceeds from fundraising by subrecipients;

Funds collected through special assessments on public improvements (unlikely in NSP );

Subrecipient proceeds from disposition of real property five years or more after grant close-out;

Income received in a single calendar year by the recipient and all its subrecipients (combined) if the total amount of such income does not exceed $25,000. This is unlikely to occur in NSP;

U.S. Department of Housing and Urban Development 1 Office of Block Grant Assistance 2011-07

Interest earned on cash advances from the grantee or funds held in a revolving loan fund account (except for funds in approved lump-sum drawdown accounts). Such interest must be returned to HUD for transmittal to the Treasury.

Regulatory and Functional Requirements The general rule in drawing NSP and CDBG funds is that funds must only be requested for immediate cash needs. Program income works on a first-in, first-out basis. It must be used before drawing down additional grant funds, unless the program income is in an approved revolving fund. In that case it must be used for the specified purpose of the revolving fund before further drawdowns for that specified activity. Program income may earn interest while being held for the next subsequent cash requirement of the grantee; that interest is also program income. Section 570.504 defines the use of program income, and is available for reference at the end of this policy.

Program income must be used for the immediate cash needs of the grantee, regardless of the next activity. That is, program income may not be held, or accumulated, for a specific activity. These activities will receive funding from available program income and grant funds at the time these funds are needed.

Example

A. Funds on hand in grantee/subrecipient account: Program income received from sale of completed NSP home: $35,000

B. Funds currently needed for ongoing demolition and land bank projects: $85,000

Request for funds from Line of Credit (B minus A): $50,000

Note that the source of the program income was different from the activity it was used to fund. Funds on hand from program income must always be disbursed for the next activity. Program income cannot be reserved for a major cost in the future but must always be disbursed when next drawing down funds, except for income in revolving loan funds. Within a revolving fund, program income must similarly be disbursed for the next activity of the fund. When income is generated by an activity that is only partially assisted with NSP funds, the income must be prorated to reflect the percentage of NSP funds used to determine the portion that is program income.

Note that NSP grants are not subject to the requirement at 24 CFR 570.504(b)(2)(iii) that program income on hand at the end of the program year that is in excess of one-twelfth of the most recent entitlement grant be remitted to HUD.

In all three phases of NSP, program income that is obligated or expended in this way will count toward obligation or expenditure requirements. The requirement to use program income first will not hinder the grantee's ability to meet spending deadlines. For NSP, policies for disposition of program income received after grant close-out have not yet been determined. Grantees should continue to follow the current requirement to use program income only on NSP-eligible activities.

Program income retains its character as NSP funding indefinitely unless otherwise provided by HUD in an applicable requirement. In NSP, funds may be spent and returned several times through the cycle of acquisition, rehab, and resale. Grantees must track program income from NSP1, NSP2 or NSP3 separately and use the funds in accordance with the relevant Notices and rules. If a project meets the


rules of multiple programs (e.g. location, beneficiaries, uses,) then program income may be combined in that project. Note that the initial requirement in the Housing and Economic Recovery Act (HERA) that program income earned after July 30, 2013 be returned to the Treasury has been rescinded. As in CDBG, program income will remain with the grantee.

Unless modified in a closeout or other agreement with HUD, all such funds must be documented when received and expended and must be used for NSP-eligible activities. NSP program income must follow all other cross-cutting requirements such as environmental, fair housing and labor laws and must be used in approved target areas or areas of greatest need unless otherwise approved by HUD. The NSP Notices allow 10% of program income to be used for administrative purposes.

In general, program income is calculated in proportion to the amount of the total cost that is paid with NSP funds. Gross revenues of $20,000 on the sale of an NSP-assisted house that is financed with 50% NSP funds and 50% other funds would result in NSP program income of $10,000 ($20,000 X 50%.)

Subrecipients and Developers

When subrecipients are involved, the grantee and subrecipient may negotiate the disposition of program income in their agreement; there is substantial flexibility in its allocation, subject to the grantee's approval. This applies to members of consortia as well. The written subrecipient agreement must specify whether any program income received by the subrecipient is to be returned to the grantee or retained by the subrecipient. If the latter, the agreement must describe which NSP-eligible activities such program income will fund. Subrecipients are described at 24 CFR 570.500(c). Section 570.503 describes the rules for subrecipient agreements. These sections are reproduced in full in Appendix 2.

The financial records of the subrecipient (as well as the grantee) must include complete information on the receipt and expenditure of program income. At the end of the term of the Agreement, program income on hand or subsequently received by a subrecipient must be returned to the grantee unless otherwise specified in the subrecipient agreement. Grantees may designate a different subrecipient for use of program income, but should specify in the first agreement that program income will be returned to the grantee. In accordance with the first use rules, though, this program income may not be held for the disbursement to the second subrecipient. Rather, funding of the second subrecipient will be available from future program income or grant funds remaining in the line of credit.

Revenues received by developers are NOT considered program income. This is because developers are treated in NSP as end users, not intermediaries like subrecipients. Households receiving financial assistance are also considered end users and are not required to operate like grantees or subrecipients, either. This determination derives from the CDBG regulation below; for NSP, it also applies to new construction.

Assistance to private individuals and entities, including profit making and nonprofit organizations, to acquire for the purpose of rehabilitation, and to rehabilitate properties, for use or resale for residential purposes; 24 CFR 570.202 (b)(1)

Although revenues received by developers are not considered program income, grantees and subrecipients may negotiate terms for transactions which result in the return of some revenues to the grantee or subrecipient. To avoid unduly enriching third parties such as developers, NSP funds must be carefully underwritten. Depending on the underwriting analysis, grantees may require developers to treat the NSP funds as a loan, or may negotiate the return of a percentage of the revenues from rents.


Income from Rental Properties Program income is defined as gross income less costs incidental to generation of the income. Since this definition corresponds to the calculation of Net Operating Income (NOI) and NOI is a commonly used calculation, this guidance will use program income and NOI interchangeably in connection with income generated by rental properties. In NSP, NOI is program income if it is received by grantees and subrecipients. Net operating income received by developers is NOT program income, as noted above.

Example:

Gross Rents $100,000 Less: Vacancies ( $7,000)

Effective Gross Income $ 93,000

LESS: Replacement Reserves ( $4,000) Operating Expenses ($45,000) (Maintenance, insurance, utilities, management, etc.) Net Operating Income $44,000

Net operating income from rental properties owned by grantees and subrecipients is calculated prior to debt service payments. In the example above, the NOI of $44,000 would be program income.

However, in many cases, there is more than one source of funds and treatment of program income as a proportional share of NOI could leave insufficient funds for debt service. In the case above, if NSP paid for 50% of the project, NSP program income would be 50% of NOI, or $22,000. If debt service on the private loan that financed the other 50% were $25,000, calculating program income prior to debt service would leave $22,000 for debt service, not enough to keep the loan current.

In NSP, HUD allows the use of program income to be applied to debt service under the following conditions:

1. The private loan(s) was used solely to finance the costs of the approved project and was made at the same time as the NSP loan (i.e. was not a existing mortgage);

2. The private loan was made by an external lender (not the grantee or subrecipient); 3. Loan proceeds were used in accordance with all applicable NSP requirements (e.g.

environmental, Davis Bacon); 4. Use of the program income for debt service payments was contemplated when the project was

approved.

Typical Problems with Program Income Improper collection or retention of program income

Subrecipient retains program income without grantee permission, or uses it in violation of terms of Agreement.

Program income in a revolving fund account is not used prior to drawing down additional funds for that activity.


Subrecipient improperly disposes of property a year after purchase and fails to ensure sale at fair market value (the amount of program income due the grantee is the current fair market value of the property).

When property that is only partially financed with NSP funds is rented or sold, the NSP program does not receive its proportional share of proceeds generated.

Program income is not returned at expiration of a subrecipient agreement.

Grantee or subrecipient treats interest earned on cash advances or on funds in a revolving account as program income, rather than remitting such interest income to the U.S. Treasury.

Failure to repay NSP funds for property acquired or improved with NSP funds in excess of $25,000 when use changes and when new use is ineligible or does not meet a National Objective for the required time period.

Improper utilization of program income

Program income is treated by subrecipient as unrestricted funds.

Program income is spent on an activity that is not eligible under NSP rules.

Program income is used for an activity that the grantee has not approved via the Agreement.

Program income is not used in compliance with all applicable regulations.

The subrecipient draws down program funds without using program income first.

Improper recording and reporting of program income

Subrecipient's financial records do not describe receipt and use of program income in an accurate, complete, and timely fashion.

Subrecipient has an inadequate system to monitor repayment or sale of loans that it has made with NSP funds.

Information on the status and use of program income reported to grantee by subrecipient is inaccurate or untimely.

Useful Strategies for Avoiding Problems with Program Income (1) Have a detailed explanation of program income requirements in a written Agreement with each

subrecipient.

(2) Provide technical assistance to subrecipients in setting up their record-keeping systems to capture data on program income.

(3) For those subrecipients operating loan programs, provide technical assistance to ensure adequate loan documentation and loan servicing systems.

(4) Require detailed program income information as part of regular progress reports and drawdown requests from subrecipients, with periodic on-site spot-checking of records by the grantee to confirm the reported data.

(5) Have an accurate and useful way to track program income as it is received and expended, and ensure that program income earned by NSP1, NSP2 and NSP3 is kept separate.


Technical assistance with early intervention to identify problems while they are still quite small is particularly important with respect to program income. In the event that the subrecipient has misspent program income, a grantee may have no option other than to disallow the related expenses. A disallowance is likely to represent a severe burden to a subrecipient and can impose a serious strain on the grantee's relationship with the subrecipient.

Ideally, any program income issues encountered with subrecipients will be of a minor and correctable nature. However, if the subrecipient is not responsive to directed corrective action, and/or persists in viewing the program income as its own money, the grantee must act expeditiously to curtail the subrecipient's authority to retain and use such funds.


APPENDIX 1: PROGRAM INCOME EXAMPLES

Question: Assume that the grantee decided to pay for closing costs out of its NSP proceeds. For example, total development costs are $120,000, of which $40,000 is a private loan and $80,000 is a NSP loan. The house sells for $90,000 and there are $5,000 in closing costs. The $40,000 construction loan is repaid with the sales proceeds, leaving $50,000 to come back to the grantee. Of that $50,000, $5,000 is left in the deal to pay for the closing costs and thus only $45,000 comes back to the grantee. What is the program income - $50,000 or $45,000? Answer: Only the $45,000 is NSP program income as this is the amount that is actually returned to the grantee. The $5,000 is a cost of the transaction, because program income is gross revenues less costs incidental to the transaction.

Question: Assume a deal where there are mixed sources of financing for the construction and acquisition, including NSP. At sale of the home, the other financing sources are paid off with loan proceeds. For example, assume that a deal has acquisition and construction costs of $120,000, of which an NSP loan paid $70,000 and a private loan paid $50,000. At closing, the house is sold for $90,000 (its market value). The private loan for $50,000 is paid off and $40,000 is repaid to the NSP grantee. How much is considered NSP program income in this case? Answer: The $40,000 that is repaid to the grantee is considered to be program income. The other $30,000 that NSP invested in this deal is a development subsidy and is not considered program income. In addition, the $50,000 repaid to the private lender is not program since the lender is not the grantee or a subrecipient.

Question: Assume that a grantee provides all its NSP funds to three subrecipients, who manage direct homebuyer assistance programs. The subrecipients provide loans to homebuyers for downpayment and closing cost assistance in the amount of $10,000 per household. These deferred payment loans are not repaid until the homebuyer re-sells the unit during the affordability period. In 2011, a homebuyer funded by subrecipient A sold their home and paid $10,000 back to the subrecipient. Also in 2011, a second homebuyer sold and repaid $10,000 to subrecipient B. No other income was received by the grantee or any of these subrecipients in 2011. How much is NSP program income? Answer: None of the $20,000 is considered program income because the total of the funds returned to the grantee and its subrecipients (in total) is less than $25,000 in a single year. The $20,000 is considered as miscellaneous revenue and the grantee can determine in its agreement with the subrecipients how these funds may be used. The funds are not subject to the NSP rules. As soon as the total reaches $25,000, then ALL of the funds are program income.

Question: Assume the same grantee with the NSP downpayment and closing cost program operated through subrecipients. In 2012, assume that two homebuyers sold their units and each repaid $10,000 (total $20,000) to subrecipient A. Three homebuyers sold and repaid subrecipient C $10,000 each (total $30,000). How much is program income? Answer: Because the total funds back to the grantee and its subrecipients exceed $25,000, the entire $50,000 is considered program income subject to the NSP rules. It is important to note that once the


$25,000 threshold is exceeded, the entire amount becomes program income not just the amount that exceeds the threshold.

Question: Assume that a NSP-assisted homebuyer project has a 5 year affordability period. The home is sold by the assisted homeowner in year 7 and the $40,000 NSP soft second loan is repaid to the grantee. How much is program income? Answer: Even though the sale occurs after the end of the period of affordability, the entire $40,000 is considered NSP program income. HUD will be issuing further guidance on the rules covering program income received after the close-out of the NSP program but the current policy is that the funds must follow the CDBG rules.

Question: Assume that a grantee uses NSP funds to pay for construction on a unit. When the unit is sold, the grantee gets $50,000 back as program income. That $50,000 of program income is then invested to construct a second unit and the grantee gets $40,000 back when the second unit is sold. How much of the $40,000 is NSP program income? Answer: NSP funds remain program income in perpetuity, regardless of the number of revolutions. Thus, the entire $40,000 is NSP program income subject to the NSP rules.

Question: Assume that a grantee provides $30,000 in NSP funds to a developer to assist them to acquire and rehabilitate a unit. When the unit is sold to a buyer, the developer pays off their private construction loans and retains $10,000 as its developer fee. No additional funds are repaid to the grantee. Is the $10,000 program income or does it need to be repaid the grantee? Answer: No, if the $10,000 is retained by the developer and not repaid to the grantee or a subrecipient, it is not considered program income. The developer is not required to return these funds to the grantee but the grantee must ensure that the funds it allows the developer to keep constitute a reasonable developer fee.

Question: Assume that a grantee invests both HOME and NSP money in a project. Total development costs are $140,000, of which $60,000 is a private loan, $50,000 is a HOME loan and $30,000 is a NSP loan. The house sells for $110,000 and the private loan is paid off. The remaining $50,000 is repaid to the grantee. How much of the $50,000 is NSP program income and how much is HOME program income? Answer: The grantee would need to pro-rate the program income between HOME and NSP in proportion to their investment. Since HOME was 63% of the grantees investment ($50,000/$80,000), 63% of the program income or $31,250 would be HOME PI and $18,750 would be NSP program income. Note that the private funds are not relevant when determining the pro-ration. It is based on the relative amounts of the grantees investment.

Question: Assume that a grantee has chosen to leave some money in a deal as homebuyer financing. Total development costs are $160,000, of which $90,000 is a private loan and $70,000 is a NSP loan. The house sells for $130,000, of which $100,000 is a private mortgage and $30,000 is a soft


second loan left in the deal by the grantee, with a mortgage note for the homebuyer. Of the $100,000 in private loan proceeds, $90,000 goes into paying back the private construction loan and $10,000 comes back to the grantee. What would be considered the NSP program income?

Answer: Only the $10,000 that is returned to the grantee is NSP program income. The $30,000 that was left in the deal as homebuyer financing is a cost of the deal and is not program income. The $90,000 that was paid to the private construction lender is also not program income. Finally, the $40,000 of NSP funds that is not repaid ($70,000 investment - $30,000 left as a soft second) is a development subsidy and is not program income.

Question: Assume a multi family project with both HOME and NSP in the deal. Total development costs are $500,000 of which $300,000 is NSP loan and $200,000 is HOME loan from the local PJ. Every year, the project will earn approximately $50,000 in NOI before payment of debt service. The HOME and the NSP loans are cash flow loans which are repaid to the HOME PJ and the NSP subrecipient. How much of the $50,000 is program income and how is it divided between HOME and NSP?

Answer: In general, the $50,000 of NOI should generally be pro-rated based on the initial investments. NSP is 60% of the initial public investment and HOME is 40%. Thus $30,000 is NSP PI (60% of $50,000) and $20,000 is cash flow that the local PJ could either allow the owner to keep or pay back some or all to it as HOME program income. Note, however, that this is a general answer as it is possible that the PJ or grantee may be getting other types of returns which could be used to compensate for their fair share of the return.

U.S. Department of Housing and Urban Development Office of Block Grant Assistance 2011-07

9

APPENDIX 2: RELEVANT EXCERPTS FROM CDBG REGULATIONS

24 CFR 570.500 Definitions.

For the purposes of this subpart, the following terms shall apply:

(a) Program income means gross income received by the recipient or a subrecipient directly generated from the use of CDBG funds, except as provided in paragraph (a)(4) of this section.

(1) Program income includes, but is not limited to, the following:

(i) Proceeds from the disposition by sale or long-term lease of real property purchased or improved with CDBG funds;

(ii) Proceeds from the disposition of equipment purchased with CDBG funds;

(iii) Gross income from the use or rental of real or personal property acquired by the recipient or by a subrecipient with CDBG funds, less costs incidental to generation of the income;

(iv) Gross income from the use or rental of real property, owned by the recipient or by a subrecipient, that was constructed or improved with CDBG funds, less costs incidental to generation of the income;

(v) Payments of principal and interest on loans made using CDBG funds, except as provided in paragraph (a)(3) of this section;

(vi) Proceeds from the sale of loans made with CDBG funds;

(vii) Proceeds from sale of obligations secured by loans made with CDBG funds;

(viii) [Reserved]

(ix) Interest earned on program income pending its disposition; and

(x) Funds collected through special assessments made against properties owned and occupied by households not of low and moderate income, where the assessments are used to recover all or part of the CDBG portion of a public improvement.

(2) Program income does not include income earned (except for interest described in 570.513) on grant advances from the U.S. Treasury. The following items of income earned on grant advances must be remitted to HUD for transmittal to the U.S. Treasury, and will not be reallocated under section 106(c) or (d) of the Act:

(i) Interest earned from the investment of the initial proceeds of a grant advance by the U.S. Treasury;

(ii) Interest earned on loans or other forms of assistance provided with CDBG funds that are used for activities determined by HUD either to be ineligible or to fail to meet a national objective in accordance with the requirements of subpart C of this part, or that fail substantially to meet any other requirement of this part; and


(iii) Interest earned on the investment of amounts reimbursed to the CDBG program account prior to the use of the reimbursed funds for eligible purposes.

(3) The calculation of the amount of program income for the recipient's CDBG program as a whole (i.e., comprising activities carried out by a grantee and its subrecipients) shall exclude payments made by subrecipients of principal and/or interest on CDBG-funded loans received from grantees if such payments are made using program income received by the subrecipient. (By making such payments, the subrecipient shall be deemed to have transferred program income to the grantee.) The amount of program income derived from this calculation shall be used for reporting purposes, for purposes of applying the requirement under 570.504(b)(2)(iii), and in determining limitations on planning and administration and public services activities to be paid for with CDBG funds.

(4) Program income does not include:

(i) Any income received in a single program year by the recipient and all its subrecipients if the total amount of such income does not exceed $25,000; and

(ii) Amounts generated by activities that are financed by a loan guaranteed under section 108 of the Act and meet one or more of the public benefit criteria specified at 570.209(b)(2)(v) or are carried out in conjunction with a grant under section 108(q) in an area determined by HUD to meet the eligibility requirements for designation as an Urban Empowerment Zone pursuant to 24 CFR part 597, subpart B. Such exclusion shall not apply if CDBG funds are used to repay the guaranteed loan. When such a guaranteed loan is partially repaid with CDBG funds, the amount generated shall be prorated to reflect the percentage of CDBG funds used. Amounts generated by activities financed with loans guaranteed under section 108 which are not defined as program income shall be treated as miscellaneous revenue and shall not be subject to any of the requirements of this part, except that the use of such funds shall be limited to activities that are located in a revitalization strategy area and implement a HUD approved area revitalization strategy pursuant to 91.215(e) of this title. However, such treatment shall not affect the right of the Secretary to require the section 108 borrower to pledge such amounts as security for the guaranteed loan. The determination whether such amounts shall constitute program income shall be governed by the provisions of the contract required at 570.705(b)(1).

(5) Examples of other receipts that are not considered program income are proceeds from fund raising activities carried out by subrecipients receiving CDBG assistance (the costs of fundraising are generally unallowable under the applicable OMB circulars referenced in 24 CFR 84.27), funds collected through special assessments used to recover the non-CDBG portion of a public improvement, and proceeds from the disposition of real property acquired or improved with CDBG funds when the disposition occurs after the applicable time period specified in 570.503(b)(3) for subrecipient-controlled property, or in 570.505 for recipient-controlled property.

24 CFR 570.500(c): Subrecipients defined Subrecipient means a public or private nonprofit agency, authority, or organization, or a for-profit entity authorized under 570.201(o), receiving CDBG funds from the recipient or another subrecipient to undertake activities eligible for such assistance under subpart C of this part. The term excludes an entity receiving CDBG funds from the recipient under the authority of 570.204, unless the grantee explicitly designates it as a subrecipient. The term does not include contractors providing supplies, equipment, construction, or services subject to the procurement requirements in 24 CFR 85.36 or 84.40, as applicable.


570.503 Agreements with subrecipients. (a) Before disbursing any CDBG funds to a subrecipient, the recipient shall sign a written agreement

with the subrecipient. The agreement shall remain in effect during any period that the subrecipient has control over CDBG funds, including program income.

(b) At a minimum, the written agreement with the subrecipient shall include provisions concerning the following following items:

(1) Statement of work. The agreement shall include a description of the work to be performed, a schedule for completing the work, and a budget. These items shall be in sufficient detail to provide a sound basis for the recipient effectively to monitor performance under the agreement.

(2) Records and reports. The recipient shall specify in the agreement the particular records the subrecipient must maintain and the particular reports the subrecipient must submit in order to assist the recipient in meeting its recordkeeping and reporting requirements.

(3) Program income. The agreement shall include the program income requirements set forth in 570.504(c). The agreement shall also specify that, at the end of the program year, the grantee may require remittance of all or part of any program income balances (including investments thereof) held by the subrecipient (except those needed for immediate cash needs, cash balances of a revolving loan fund, cash balances from a lump sum drawdown, or cash or investments held for section 108 security needs).

(4) Uniform administrative requirements. The agreement shall require the subrecipient to comply with applicable uniform administrative requirements, as described in 570.502.

(5) Other program requirements. The agreement shall require the subrecipient to carry out each activity in compliance with all Federal laws and regulations described in subpart K of these regulations, except that:

(i) The subrecipient does not assume the recipient's environmental responsibilities described at 570.604; and

(ii) The subrecipient does not assume the recipient's responsibility for initiating the review process under the provisions of 24 CFR part 52.

(6) Suspension and termination. The agreement shall specify that, in accordance with 24 CFR 85.43, suspension or termination may occur if the subrecipient materially fails to comply with any term of the award, and that the award may be terminated for convenience in accordance with 24 CFR 85.44.

(7) Reversion of assets. The agreement shall specify that upon its expiration the subrecipient shall transfer to the recipient any CDBG funds on hand at the time of expiration and any accounts receivable attributable to the use of CDBG funds. It shall also include provisions designed to ensure that any real property under the subrecipient's control that was acquired or improved in whole or in part with CDBG funds (including CDBG funds provided to the subrecipient in the form of a loan) in excess of $25,000 is either:

(i) Used to meet one of the national objectives in 570.208 (formerly 570.901) until five years after expiration of the agreement, or for such longer period of time as determined to be appropriate by the recipient; or


(ii) Not used in accordance with paragraph (b)(7)(i) of this section, in which event the subrecipient shall pay to the recipient an amount equal to the current market value of the property less any portion of the value attributable to expenditures of non-CDBG funds for the acquisition of, or improvement to, the property. The payment is program income to the recipient. (No payment is required after the period of time specified in paragraph (b)(7)(i) of this section.)

[53 FR 8058, Mar. 11, 1988, as amended at 53 FR 41331, Oct. 21, 1988; 57 FR 27120, June 17, 1992; 60 FR 56915, Nov. 9, 1995; 68 FR 56405, Sept. 30, 2003]

570.504 Program income. (a) Recording program income. The receipt and expenditure of program income as defined in

570.500(a) shall be recorded as part of the financial transactions of the grant program.

(b) Disposition of program income received by recipients. (1) Program income received before grant closeout may be retained by the recipient if the income is treated as additional CDBG funds subject to all applicable requirements governing the use of CDBG funds.

(2) If the recipient chooses to retain program income, that program income shall be disposed of as follows:

(i) Program income in the form of repayments to, or interest earned on, a revolving fund as defined in 570.500(b) shall be substantially disbursed from the fund before additional cash withdrawals are made from the U.S. Treasury for the same activity. (This rule does not prevent a lump sum disbursement to finance the rehabilitation of privately owned properties as provided for in 570.513.)

(ii) Substantially all other program income shall be disbursed for eligible activities before additional cash withdrawals are made from the U.S. Treasury.

(iii) At the end of each program year, the aggregate amount of program income cash balances and any investment thereof (except those needed for immediate cash needs, cash balances of a revolving loan fund, cash balances from a lump-sum drawdown, or cash or investments held for section 108 loan guarantee security needs) that, as of the last day of the program year, exceeds one-twelfth of the most recent grant made pursuant to 570.304 shall be remitted to HUD as soon as practicable thereafter, to be placed in the recipient's line of credit. This provision applies to program income cash balances and investments thereof held by the grantee and its subrecipients. (This provision shall be applied for the first time at the end of the program year for which Federal Fiscal Year 1996 funds are provided.)

(3) Program income on hand at the time of closeout shall continue to be subject to the eligibility requirements in subpart C and all other applicable provisions of this part until it is expended.

(4) Unless otherwise provided in any grant closeout agreement, and subject to the requirements of paragraph (b)(5) of this section, income received after closeout shall not be governed by the provisions of this part, except that, if at the time of closeout the recipient has another ongoing CDBG grant received directly from HUD, funds received after closeout shall be treated as program income of the ongoing grant program.

(5) If the recipient does not have another ongoing grant received directly from HUD at the time of closeout, income received after closeout from the disposition of real property or from loans outstanding at the time of closeout shall not be governed by the provisions of this part, except that such income shall be


used for activities that meet one of the national objectives in 570.901 and the eligibility requirements described in section 105 of the Act.

(c) Disposition of program income received by subrecipients. The written agreement between the recipient and the subrecipient, as required by 570.503, shall specify whether program income received is to be returned to the recipient or retained by the subrecipient. Where program income is to be retained by the subrecipient, the agreement shall specify the activities that will be undertaken with the program income and that all provisions of the written agreement shall apply to the specified activities. When the subrecipient retains program income, transfers of grant funds by the recipient to the subrecipient shall be adjusted according to the principles described in paragraphs (b)(2) (i) and (ii) of this section. Any program income on hand when the agreement expires, or received after the agreement's expiration, shall be paid to the recipient as required by 570.503(b)(3).

(d) Disposition of certain program income received by urban counties. Program income derived from urban county program activities undertaken by or within the jurisdiction of a unit of general local government which thereafter terminates its participation in the urban county shall continue to be program income of the urban county. The urban county may transfer the program income to the unit of general local government, upon its termination of urban county participation, provided that the unit of general local government has become an entitlement grantee and agrees to use the program income in its own CDBG entitlement program.


APPENDIX 3: PROGRAM INCOME IN DRGR


DRGR does not, as a system, assist grantees in complying with the first-in/first-out rule for program income. It is a grantees responsibility to track the timing of drawing program income versus program funds in a separate internal system.

Additionally, there is currently no separate module in DRGR for tracking Program Income. Grantees are to track PI received in the current quarters QPR on the activity that generated it. Receipting PI in the QPR will add to the sum of all PI for the entire grant; thus, the sum of all PI not drawn to date may be selected as a source of funds per activity when creating a voucher in the drawdown module.


The two points at which program income must be tracked in DRGR are 1) program income received and 2) program income dispersed. PI received is reported in the QPR in the quarter in which it was received and should be entered in the DRGR activity generating the program income.

A grantee only needs to SAVE the QPR after entering the program income amounts to enable the user to select PI as a source when creating a voucher in the drawdown module.

To track program income disbursed, a grantee uses the same protocol when drawing down program funds through the creation of a voucher. However, it will select program income as the source of funds. Importantly, available PI is the SUM of all PI a grantee has generated across all activities on that grant that has not yet been processed as drawdown.


The Reports Module in DRGR enables the user to create standard reports that display easy-to-read information based on the data a grantee has entered into DRGR. To view a comprehensive report regarding information submitted on Program Income a user may pull FinReport: Program Income Activity Level. This report may assist a user in identifying discrepancies between internal records and DRGR entries.


This screenshot demonstrates in a QPR, at the Activity, where to enter the most current in-quarter estimate of program income received. A user may demonstrate a receipt of the PI within a quarter by saving the QPR and, then, submitting the QPR by the deadline.


Program income disbursements are recorded in the Drawdown module. This screenshot captures a user in the first steps of creating a voucher. When creating a voucher, a user must select the source of funds program income or program funds for each line item of the voucher.


This screenshot captures the second page of creating a voucher. The grantee has chosen in the first page to include five line items in the voucher: three for program funds and two for program income (see column titled Fund Type in the Voucher Items table).

For both line items using program income, there is $204,426.00 available (see column titled Available Amount in the Voucher Items table). This is the total amount of program income available for the entire grant; therefore, the sum of drawdown amount of both line items cannot exceed $204,426.00.

For simple DRGR math rules: Available Amount of PI = Sum of All Program Income Received (-PI drawn amount)

http:204,426.00http:204,426.00

In the case study example outlined in this slide, the grantee has recorded, in the QPR module, receipt of $304,426 of program income. The grantee has drawn $100,000 thus far. Therefore, based on the DRGR math rule, a total of $204,426 can still be drawdown.

The grantees next draw will include program income as a source of funding. With a total of $204,426 available of PI funds, the grantee will draw $154,426 from one activity and $50,000 from a second activity: thus, demonstrating that PI can be receipted against one activity but drawn from other activities. To determine which activities to draw the PI funds against, a grantee must follow the first-in, first-out rules.


Q.1. To demonstrate a revolving loan fund (RLF) in DRGR, the grantee will enter a new activity in the DRGR Action Plan, but the program funds will have a budget of zero dollars. The grantee will utilize the same DRGR protocol for demonstrating receipt and disbursement of PI funds for funds associated with the RLF: therefore, it will receipt the RLF funds in the QPR module for the RLF activity in the cell marked Program Income Received and report disbursements through the Drawdown module by selecting Program Income as the source of funds when creating the voucher.

In establishing the RLF activity in DRGR, the same protocol is used in establishing any new DRGR activity: enter narratives, complete data entries including national objectives, performance measures, etc.


Q.2. First, a grantee will record the PI received for the acquisition/rehabilitation activity in the QPR module for that activity. Then, the grantee will create a voucher by establishing two line items of program income funds one for each Activity to bill the draw against.

The screenshot demonstrates an example of PI funds that were receipted in one particular activity, but partially drawn from two activities (BEDCLH25 and EHabitatLH25). As per first-in/first-out protocol, the program income funds that are sitting on hand must be used for the next eligible NSP expense prior to drawing new grant funds. Thus, the grantee had received $325,639.07 from activities under BEDCHL25 and entered that amount in the current QPR. Then, the next draw was to cover expenses for BEDCLH25 (totaling $106545.31) and for EHabitatLH25 (totaling $35,985.24) and, therefore, drew down the program income funds first.

http:35,985.24http:106545.31http:325,639.07

Q.3. For the third question, the grantee is still going to use the first in first out rule to disperse funds. The grantee can decrease the activity budget for which the program income was received and increase the activity budget in which the program income is going to be designated for. This occurs because activity draws down plus program income draw down equals the total activity draw.


The above slide, and the following slide, capture an example of tracking the movement of funds when an Activity has a capped budget. For Activity #EHabitat LH25, the budget is $824,000, grant funds disbursed is $169,001.35 and program income funds disbursed is $35,985.24. Total funds drawn to date is $204,986.59, or the sum of program funds drawn and PI drawn.

In this scenario, the grantee has chosen to allow only $824,000 as the total amount to be drawn against Habitat for Humanitys Activity #EHabitatLH25. And, the grantee has chosen to use the funds generated as program income for their BEDCLMMI activity. Therefore, the grantee must decrease the EHabitatLH25s budget by the PI disbursed against that activity and, subsequently, increase the budget of BEDCLMMI by the same amount.

http:204,986.59http:35,985.24http:169,001.35

To continue from the previous slide, this screenshot demonstrates the changes in the Activities budgets. EHabitat LH25s budget has been reduced from $824,000 by the PI disbursed ($35,965.24) to equal $788,014.76. Subsequently, the budget for BEDCLMMI category has been increased to $4,588,839.24 by adding the value of the program income disbursed amount from EHabitatLH25 ($35,965.24).

http:35,965.24http:4,588,839.24http:788,014.76http:35,965.24

Word BookmarksAppendix1Appendix224:3.1.1.3.4.10.1.124:3.1.1.3.4.10.1.424:3.1.1.3.4.10.1.5Appendix3

nsp policy alert: program income - hud exchange policy alert... · nsp policy alert! program income...

Documents