Additional Help is on the Way to Stabilize the Housing Market

Nathan Humphrey & Drew Marlar[1]
Kutak Rock LLP

Although foreclosures continue to mount, HUD’s Neighborhood Stabilization Program (“NSP”) has begun to have an effect on some Colorado neighborhoods. The Housing and Economic Recovery Act of 2008[2] (“HERA”), signed into law on July 30, 2008, originally authorized the NSP (“NSP 1”). This first round of funding provided $3.92 billion in emergency federal funds to stabilize neighborhoods impacted by foreclosed and abandoned properties. Hoping to add to the momentum of the housing recovery, the American Recovery and Reinvestment Act of 2009 (“ARRA”) authorized a second phase of funding (“NSP 2”). NSP 2 required HUD to distribute $1.93 billion in funds to carry-out neighborhood stabilization activities and $50 million to provide technical assistance across the country. 

While NSP 1 funds were only allocated to state governmental jurisdictions with the greatest needs, HUD awarded NSP 2 funds to 56 of the 482 applicants.[3] The award recipients included states, units of general local government, nonprofits, as well as a consortia of nonprofits pursuant to a separate competitive application process. Under this program, $19 million was allocated to the City and County of Denver and $23.4 million to Chicanos Por La Casa, Inc. also located in Colorado.[4] Applicants submitted their requests in July 2009 and were required to demonstrate their ability to either return a minimum of 100 abandoned or foreclosed homes back to productive use or otherwise eliminate or mitigate the properties’ negative effect on the stability of the target geography which was to involve at least 75 units of housing. The grantees of NSP 2 funds could partner with for‑profit entities on their projects.  

NSP 2 has similar requirements to NSP 1. All funds must be made available to individuals and families whose income does not exceed 120% of area median income. Furthermore, 25% of funds must be used to purchase and redevelop abandoned or foreclosed homes or residential properties for the benefit of individuals or families whose income does not exceed 50% of area median income. There are three ways to satisfy the 120% area median income requirement under NSP 2, either by: (1) providing or improving permanent residential structures that will be occupied by a household whose income is at or below 120% area median income; (2) serving an area in which at least 51% of the residents have incomes at or below 120% area median income; or (3) serving a limited clientele whose incomes are at or below 120% area median income.

NSP 2 is on a more expedited timeline than NSP 1 as all NSP 2 recipients must expend 50% of their award on eligible activities within two years and 100% within 3 years. Also, the previous NSP 1 requirement that revenues generated by the use of NSP funds be returned to the U.S. Treasury after five years has been repealed. Instead, excess cash flow generated by an NSP assisted project should be shared with the NSP recipient for the continued investment in target neighborhoods. Generally, excess cash flow on a real estate project is the amount of cash generated from operations, sales, or refinancing that is above the amount required to provide the owner with a reasonable return on his/her equity investment. 

ARRA and NSP 2 regulations also revised the original NSP legislation. Specifically: (a) NSP funds may be used to establish and operate land banks for homes and residential properties (as opposed to just establish land banks); (b) NSP funds allotted to redevelop demolished or vacant structures can only be used for housing (as opposed to the small‑scale commercial uses previously permitted); and, (c) the purchase price for each property acquired with NSP funds must be discounted at least 1% under the fair market value, however, there is no aggregate fair market value discount requirement (as opposed to a minimum 5% discount and 15% aggregate discount previously). Additionally, ARRA forbids grant and loan recipients from refusing to rent a unit in an NSP assisted dwelling to a household based on their status as a Section 8 voucher holder (this also applies to the original NSP legislation) and establishes required notice periods for certain tenants prior to eviction.

NSP 1 and NSP 2 have provided many interesting opportunities for developers and local jurisdictions to help alleviate the effects that subprime lending and foreclosures have had on our communities. We have seen the first effects of this funding make its way into a number of different projects and the results look promising. We are hopeful that this program will make significant progress in providing housing opportunities to low‑income residents while helping stabilize our neighborhoods affected by this unprecedented housing crisis.

 


[1] Originally published by the Colorado Real Estate Journal. Reprinted with permission.

[2] Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289, 122 Stat. 2654 (codified as 12 U.S.C. § 4501).

[3] Neighborhood Reinvestment Corp., NSB 2 Awards, available at http://www.stablecommunities.org/library/nsp-2-awards.

[4]U.S. Hous. & Urban Dev., NSP2 Grantees (2010), available at http://www.safeguardproperties.com/News_and_Events/All_Client_Alerts/2010/01/US_Housing_and_Urban_Development_NSP_2_Funds_Awardees.aspx.