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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;
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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
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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.
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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.
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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.
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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.
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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
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$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
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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.
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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
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(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.
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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
U.S. Department of Housing and Urban Development 12 Office of
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(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
U.S. Department of Housing and Urban Development 13 Office of
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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.
U.S. Department of Housing and Urban Development 14 Office of
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APPENDIX 3: PROGRAM INCOME IN DRGR
U.S. Department of Housing and Urban Development 15 Office of
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U.S. Department of Housing and Urban Development 16 Office of
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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.
U.S. Department of Housing and Urban Development 17 Office of
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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.
U.S. Department of Housing and Urban Development 18 Office of
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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.
U.S. Department of Housing and Urban Development 19 Office of
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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.
U.S. Department of Housing and Urban Development 20 Office of
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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.
U.S. Department of Housing and Urban Development 21 Office of
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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)
U.S. Department of Housing and Urban Development 22 Office of
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http:204,426.00http:204,426.00
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U.S. Department of Housing and Urban Development 23 Office of
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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.
U.S. Department of Housing and Urban Development 24 Office of
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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.
U.S. Department of Housing and Urban Development 25 Office of
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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.
U.S. Department of Housing and Urban Development 26 Office of
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http:35,985.24http:106545.31http:325,639.07
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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.
U.S. Department of Housing and Urban Development 27 Office of
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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.
U.S. Department of Housing and Urban Development 28 Office of
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http:204,986.59http:35,985.24http:169,001.35
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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).
U.S. Department of Housing and Urban Development 29 Office of
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http:35,965.24http:4,588,839.24http:788,014.76http:35,965.24
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U.S. Department of Housing and Urban Development 30 Office of
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U.S. Department of Housing and Urban Development 31 Office of
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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