Can a municipality use CSLFRF to fund affordable housing development through loans with maturities longer than December 31, 2026, with the expectation that these loans will not be repaid and no payments will be made over the course of a 30-year loan term?

American Rescue Plan Act of 2021 (“ARP”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) may be used to support eligible affordable housing development. However, loans with maturities extending beyond December 31, 2026 may only be funded using CSLFRF to a certain extent (and not for the entirety of the principal of the loan), unless the loans are funded under the revenue loss eligible use category.

The Final Rule Frequently Asked Questions (“FAQs”) states:

[C]SLFRF funds may be used to make loans, provided that the loan supports an activity that is an eligible use of funds, the [C]SLFRF funds used to make the loan are obligated by December 31, 2024 and expended by December 31, 2026, and the cost of the loan is tracked and reported in accordance with the points below. For example, a recipient may, consistent with the requirements of the interim final rule and final rule, use funds to finance the construction of affordable housing.[1]

The FAQs continue:

For loans with maturities longer than December 31, 2026, the recipient may use funds for only the projected cost of the loan.

• Recipients can project the cost of the loan by estimating the subsidy cost. The subsidy cost is the estimated present value of the cash flows from the recipient (excluding administrative expenses) less the estimated present value of the cash flows to the recipient resulting from a loan, discounted at the recipient’s cost of funding and discounted to the time when the loan is disbursed. The cash flows are the contractual cash flows adjusted for expected deviations from the contract terms (delinquencies, defaults, prepayments, and other factors). A recipient’s cost of funding can be determined based on the interest rates of securities with a similar maturity to the cash flow being discounted that were either (i) recently issued by the recipient or (ii) recently issued by a unit of state, local, or Tribal government similar to the recipient.
• Recipients may also treat the cost of the loan as equal to the expected credit losses over the life of the loan based on the Current Expected Credit Loss (CECL) standard. Recipients may measure projected losses either once, at the time the loan is extended, or annually over the period of performance.
• Under either approach for measuring the amount of funds used to make loans with maturities longer than December 31, 2026, recipients would not be subject to restrictions under 2 CFR 200.307(e)(1) and need not separately track repayment of principal or interest.
• Additionally, recipients may use funds for eligible administrative expenses incurred in the period of performance, which include the reasonable administrative expenses associated with a loan made in whole, or in part, with funds. See section IV.E of the final rule [for more information regarding administrative expenses].[2]

Finally, the FAQs address loans funded under the revenue loss eligible use category:

[I]f a recipient uses revenue loss funds to fund a loan, whether or not the maturity of the loan is after December 31, 2026, the loaned funds may be considered to be expended at the point of disbursement to the borrower, and repayments on such loans are not subject to program income rules. Similarly, any contribution of revenue loss funds to a revolving loan fund may also follow the approach of loans funded under the revenue loss eligible use category.[3]

As such, while there are a variety of constraints on the allowability of loans extending beyond December 31, 2026 for most expenditure categories, funds designated under the revenue loss category allow more flexibility for such loans.

Additionally, there are other issues that a recipient should consider based on the nature of the loan. The intent of the project and the stipulations enumerated in the loan must be documented so that failure to obtain repayment does not become an audit issue. The recipient is responsible for maintaining compliance with all CSLFRF guidelines and requirements. Recipients must comply with Uniform Guidance cost principles, such as those relating to efficient and effective program administration, documentation, and cost allocation plans.[4] Recipients must also provide detailed obligation and expenditure information for any loans issued to the U.S. Department of the Treasury (“Treasury”).[5] Subrecipient monitoring requirements may also apply.[6]

More generally, investments in affordable housing development are considered eligible for CSLFRF if the project is eligible for funding under either the National Housing Trust Fund (“HTF”) or the Home Investment Partnerships Program (“HOME”).[7] These capital expenditures also require substantive written justification demonstrating that the project “is a related and reasonably proportional response to the harm identified” if the total project costs will exceed $1 million, and must be submitted to Treasury as part of the CSLFRF reporting process if the project costs exceed $10 million. This written justification must include a description of the specific harm or need to be addressed, an explanation of why a capital expenditure is appropriate and why current facilities are inadequate, and a comparison of the proposed capital project against at least two alternative capital expenditures demonstrating the superiority of the selected project. These requirements for eligibility under HTF or HOME and written justification are not required under the revenue loss eligibility category.[8]