Subsidy layering occurs when a project receives funds from more than one governmental source. As detailed in HUD Notice CPD 98-01, participating jurisdictions (PJs) planning to combine HOME funds and other governmental funds for a project must conduct an evaluation to demonstrate that the project will not use more HOME funding than necessary to provide affordable housing. In addition, other affordable housing programs may have their own requirements triggered by subsidy layering.

A subsidy layering analysis is recommended, even for projects that do not receive other governmental funds besides HOME, because the analysis poses important questions about the project's feasibility and the appropriate use of HOME funds. While this Template does not replace a formal subsidy layering evaluation, this discussion of subsidy layering is designed to familiarize you with the concepts involved and to prompt you to begin asking questions related to subsidy layering. To begin a more formal subsidy layering evaluation, begin by consulting HUD Notice CPD 98-01.

The HOME Program subsidy layering evaluation consists of four major components, some requiring documentation and others requiring analysis and review of project details:

Sources and Uses of Funds Statement

The Gap Analysis tab of the Template summarizes the sources and uses of your project. In addition, HUD Notice CPD 98-01 lists supporting documentation required for each funding source and each proposed use of funds.

Certification of Federal Assistance

The PJ should obtain a formal certification concerning any governmental assistance provided or to be provided to a project. In addition, HUD Notice CPD 98-01 requires certification related to the absence or possible future pursuit of governmental assistance. See the Notice for more details.

Project Development Budget

The Development Costs tab of the Template provides information similar to that contained in a project development budget. The PJ should review the project development budget to determine whether the budget is complete and whether the development costs are necessary and reasonable.

The PJ should also review to ensure that the costs being funded by the HOME Program are eligible and the HOME funds per unit do not exceed the maximum per-unit subsidy limits. The PJ's review guidelines should focus on the project's quality, and construction costs, architectural and engineering fees and consulting fees. The PJ should determine what costs are necessary depending on the type of development activity (e.g., new construction vs. rehabilitation or occupied vs. unoccupied). The determination of "reasonableness" of the costs should be based on all of the following factors: (1) costs of comparable projects in the same geographical area; (2) the qualifications of the cost estimators for the various budget line items and (3) comparable costs published by recognized industry cost index services.

Typical questions asked during this portion of the subsidy layering analysis include:

• Is the amount of builder profit appropriate? On the Development Costs tab, in the row where you entered builder profit, the Template provides the amount of builder profit as a percentage of construction costs.
  
  
• Is the developer's fee appropriate? The Development Costs tab provides the amount of the developer's fee as a percentage of total development costs.
  
  
• Are the acquisition costs for land and existing structures appropriate? The Development Costs tab provides these costs on a per unit basis, for your information.
  
  
• Are syndication fees appropriate? The Development Costs tab provides the amount of syndication fees as a percentage of tax credit equity. (Note that the Template will not calculate this percentage until you have entered the amount of tax credit equity later in this module, on the Financing Sources tab.)

Operating Pro-Forma (Rate of Return on Equity Investment)

HUD Notice CPD 98-01 requires a project pro-forma that meets a number of requirements related to the presentation of rents, expenses, cash flows, tax benefits, and other line items. The Operating Pro-Forma tab of the Template is a good start, but is not intended to substitute for the pro-forma format required for the subsidy layering evaluation. As part of the evaluation, PJ's are expected to determine whether the cash flow projections contained in the pro-forma are reasonable given current economic conditions.