“Choice is the hinge of destiny.” – Edwin Markham
Of the many regulatory pitfalls that affordable housing developers confront, one of the earliest challenges in the process is the prohibition on “choice limiting activities” in HUD’s regulations. If a developer wants to use HOME funds as a source of financing, beware the problem of committing any funds for acquisition before an environmental review under the National Environmental Policy Act (NEPA) is completed. I really mean “any” funds; private funds are included in this ban. The required review is not the environmental review a developer would perform to determine if the site is contaminated. It is, instead, a review, initiated by a “Responsible Entity” (typically a unit of state government), that the project as constructed will not have an adverse impact on the environment. Because HUD wants to avoid funding projects that adversely affect the environment, “[c]ompletion of the environmental review process is mandatory before taking a physical action on a site, or making a commitment or expenditure of HUD or non-HUD funds for property acquisition, rehabilitation, conversion, lease, repair or construction activities.” HUD Notice CPD-01-11. As the regulations state, “the environmental review process should begin as soon as a recipient determines the projected use of HUD assistance.” 24 CFR 58.30.
But how can a developer get site control without expending funds? The regulations create a small exception for options to purchase. “An option agreement on a proposed site or property is allowable prior to the completion of the environmental review if the option agreement is subject to a determination by the recipient on the desirability of the property for the project as a result of the completion of the environmental review in accordance with this part and the cost of the option is a nominal portion of the purchase price.” 24 CFR 58.22(d). The difficulty here is persuading a seller to give you an option for a “nominal portion of the purchase price.”
But, if a developer is thinking about using HOME money and also needs site control, the best approach is to ask the property seller to accept an option to purchase. It is also a good idea to recite the need for environmental review under the HUD regs in the option agreement. Making sure these steps are properly implemented will mean fewer problems when you are closing the HOME financing eighteen months later (or whenever you are ready to finance your project).
By the way, in case you are interested, Edwin Markham was an early twentieth century poet and was the poet laureate for Oregon in 1923 (as least according to Wikipedia) . Can’t say there is much poetry in HUD regulations but maybe I just haven’t read them long enough.