Is housing subject to capital justification elements in the Final Rule? If so, where a city used ARP funding for gap financing for affordable housing, would the capital justification apply to only the city investment or to the total project?

Written Justifications for Affordable Housing

Under the Final Rule, certain affordable housing projects can be considered eligible uses of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) and are subject to relevant capital expenditure justification requirements.

The development, repair, and operation of affordable housing could be considered eligible for CSLFRF as a form of assistance to households in response to the negative economic impacts of the COVID-19 pandemic.[1] The Final Rule considers affordable housing to be a development that is eligible for funding under the National Housing Trust Fund (“HTF”) or the Home Investment Partnerships Program (“HOME”).[2] The project tied to the capital expenditure must meet the above standards to be considered an affordable housing project under the Final Rule.

The project must meet capital project criteria for proportionality and cost effectiveness. Projects with total expected capital expenditures over $1 million require written justification of their proportionality and cost effectiveness. If the total project cost (and not merely the amount of the capital expenditure using CSLFRF program funds) is at least $1 million but less than $10 million, the written justification should be retained but does not need to be submitted to Treasury as part of regular reporting. However, if the total project cost is greater than $10 million, the written justification should be submitted as part of regular reporting.[3] Such written justification is not required for Tribal recipients,[4] and eligible capital expenditures on projects under $1 million are presumed to be proportional.[5]

The written justification should describe the harm or need to be addressed, including an explanation of how the harm was exacerbated or caused by the public health emergency, and, if appropriate, information on the extent/type of harm (e.g., the number of individuals affected). It should also detail the reasons that a capital expenditure is appropriate to address the harm or need. The explanation of how the expenditure would address the harm or need should include: (i) an independent assessment of how the expenditure would address the issue; (ii) an explanation how existing equipment, property, or facilities are inadequate to meet the need, and (iii) the reasons that additional funding to other programs is not sufficient to address the problem. In addition, the written justification should compare the proposed capital expenditure against two alternative capital expenditures that are potentially effective and reasonably feasible, including the alternative of improving existing owned capital assets or leasing such assets. In taking this last step, recipients should use quantitative data where available and compare both the effectiveness and the cost of the proposed expenditure against the alternatives.[6]

Gap Financing for Affordable Housing

Recipients may use CSLFRF program funds to make loans for uses that are otherwise eligible.[7] The Final Rule states that:

Expenditures from closely related activities directed toward a common purpose are considered part of the scope of one project. These expenditures can include capital expenditures, as well as expenditures on related programs, services, or other interventions. A project includes expenditures that are interdependent (e.g., acquisition of land, construction of the school on the land, and purchase of school equipment), or are of the same or similar type and would be utilized for a common purpose (e.g., acquisition of a fleet of ambulances that would be used for COVID-19 emergency response). Recipients must not segment a larger project into smaller projects in order to evade review.[8]

Providing a gap financing facility (presumably at financially advantageous terms) is directly incentivizing the project. As a result, the project can be considered material with respect to funding a portion of the capital project. That funding can only be provided if CSLFRF eligibility criteria are met, unless funding is being used pursuant to the revenue loss provision. As such, while there is no explicit discussion in the Final Rule of providing debt financing for capital projects, a written justification will likely be required. 

In accounting for loans made using CSLFRF program funds for the purposes of CSLFRF reporting and compliance, the Final Rule states that:

[CSLFRF] funds must be used to cover “costs incurred” by the recipient between March 3, 2021 and December 31, 2024. The interim final rule provided [and the Final Rule affirms] that [CSLFRF] funds must be obligated by December 31, 2024 and expended by December 31, 2026. In using [CSLFRF] funds to make loans, recipients must be able to determine the amount of funds used to make a loan and must comply with restrictions on the timing of the use of funds and with restrictions in the Uniform Guidance.

When [CSLFRF] funds are used as the principal for loans, there is an expectation that a significant share of the loaned funds will be repaid. Thus, recipients may not simply consider the full amount of loaned funds to be permanently expended and must appropriately account for the return of loaned funds.

For loans that mature or are forgiven on or before December 31, 2026, the recipient must account for the use of funds on a cash flow basis, consistent with Treasury’s guidance regarding loans made by recipients using payments from the Coronavirus Relief Fund.  Recipients may use [CSLFRF] funds to fund the principal of the loan and in that case must track repayment of principal and interest (i.e., “program income,” as defined under 2 CFR 200). When the loan is made, recipients must report the principal of the loan as an expense.

Repayment of principal may be re-used only for eligible uses and is subject to restrictions on the timing of the use of funds. Interest payments received prior to the end of the period of performance will be considered an addition to the total award and may be used for any purpose that is an eligible use of funds under the statute and final rule. Recipients are not subject to restrictions under 2 CFR 200.307(e)(1) with respect to such payments.

For loans with maturities longer than December 31, 2026, the recipient must estimate the cost to the recipient of extending the loan over the life of the loan. In other words, at origination, the recipient must measure the projected cost of the loan and may use [CSLFRF] funds for the projected cost of the loan. Recipients have two options for estimating this amount: they may estimate the subsidy cost (i.e., net present value of estimated cash flows) or the discounted cash flow under current expected credit losses (i.e., CECL method).[9]

Some Relevant General Final Rule Capital Expenditure Considerations

The provisions of the Uniform Guidance—2 C.F.R. Part 200—generally apply, and many will be relevant in such a situation. For the purposes of regulations in the Uniform Guidance, including the provisions relating to capital projects or construction in Appendix II of the Uniform Guidance, such as those relating to required contract language from the Contract Work Hours and Safety Standards Act and the Byrd Anti-Lobbying Amendment, the operative project amount is the total amount of the project rather than the amount of federal funding contributed. Cost principles and program income (with the exception of 2 C.F.R. 200.307(e)(1)) regulations would both apply to such capital expenditure projects.

Lastly, certain projects substantially initiated prior to the release of the Final Rule using provisions articulated in the Interim Final Rule may be exempt from the written justification requirements. Treasury has released a Statement Regarding Compliance with the Coronavirus State and Local Fiscal Recovery Funds Interim Final Rule and Final Rule, which states:

To the extent that a recipient has taken significant steps toward obligating [CSLFRF] funds in a manner consistent with the interim final rule prior to January 6, 2022, Treasury will generally not take action to enforce provisions contained in the final rule, to the extent that they are more restrictive than those in the interim final rule. Such significant steps include initiation of procurement or grantmaking actions, detailed planning of projects or programs, appropriation of funds, and other significant planning steps…

…The final rule includes a framework for determining whether a capital expenditure would be eligible as a response to the public health emergency or its negative economic impacts, which includes a requirement to prepare a written justification for projects with actual or expected capital expenditures of $1 million or more. A recipient is not required to prepare or submit a written justification as required under the final rule if the recipient (i) has taken significant steps toward obligating [CSLFRF] funds for that project prior to January 6, 2022 or (ii) has obligated funds for such project prior to April 1, 2022.[10]