Administrative Rules of the State of Montana

BEFORE THE DEPARTMENT OF COMMERCE

OF THE STATE OF MONTANA

In the matter of the adoption of New Rule I pertaining to the administration of the 2017 and 2018 Program Year Community Development Block Grant (CDBG) Program – Small-Scale Housing Development and Rehabilitation Application Guidelines

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NOTICE OF ADOPTION

TO: All Concerned Persons

1. On August 5, 2016, the Department of Commerce published MAR Notice No. 8-94-149 pertaining to the public hearing on the proposed adoption of the above-stated rule at page 1292 of the 2016 Montana Administrative Register, Issue Number 15.

2. The department has thoroughly considered the comments and testimony received. The comments received and the department's responses are as follows:

COMMENT #1: First, want to compliment the Department and the Division on the idea, the concept behind this Program. It's an outstanding idea and it's very critically needed in all areas of Montana, in particular, outside the entitlement cities where CDBG money is often used for home improvement or manufactured home replacement in those cities, so I want to really thank you very much for that.

RESPONSE #1: Thank you for your support of the SSHDR program.

COMMENT #2: So, I want to first move to page 6, and on page 6 dealing with what I believe is the general application, not the 'specific project' application, the word "project" is used repeatedly and I just wondered if for clarification we had to have another language, maybe a strategy so we don't get confused between a project-specific item, like the manufactured house replacement at 1015 Fourth Avenue South Cascade, Montana versus the overall strategy proposal for the individual County or City… and I know that 'project' is used on page 7 as well and I just suggest that clarifying language is needed there.

RESPONSE #2: Thank you for your comment. Commerce concurs that the language may be confusing and will modify the terms in the application guidelines as follows. The term "project" is defined as the overall goals and impact of the 5-year performance period. The term "activity/activities" is defined as an individual housing development or rehabilitation action that is taken to improve or assist the unit with CDBG funds.

COMMENT #3: I'm going to now move to page 8, and at the bottom of page 8 there's a reference to applications being originally ranked by the Commerce staff… I don't believe that I know that there is ranking available for this particular "non-competitive by nature." Non-competitive, to me, would be no ranking, so I just call your attention to that language and wonder if something else should be substituted.

RESPONSE #3: Thank you for your comment. Commerce concurs that this language may be confusing. The SSHDR applications are not competitive; however, any application must still meet the intent of the program and reviewed by Commerce staff to ensure that the proposal is consistent with these guidelines and CDBG regulations. Phrases referencing a ranking process will be removed and replaced with "review."

COMMENT #4: Lastly, I want to make some general comments, I'm sorry -on this section, I want to make some general comments. First of all, the way I read the rules, in all cases the CDBG assistance has to be a loan. It can be a forgivable loan; it can be a deferred mortgage and other pieces, but I want to paint a picture here and those of us who work a lot in renovation, purchased acquisition/renovation, as well as manufactured housing replacement, know how difficult it is to bring a house up to the standards that are required and still have the house, the loan-to-value, combined loan-to-value of all mortgages on the house, at 100% or less. So, by forcing all of these to be a loan with a lien of some kind… basically, A) the project just doesn't get done or B) the homeowner is upside down in their mortgage loan-to-value the day they sign the CDBG paperwork. Now, we know that some of that can be forgiven, et cetera, but I believe strongly in the equity-building value of homeownership and, if the mortgage or a customer is upside-down in their mortgage from day one, it could take them years to ever have a dime of equity in that house.

RESPONSE #4: Thank you for your comment. The CDBG SSHDR program was created to be administered state-wide; since not all housing markets are the same the program allows for grantees to set the financial loan terms, in their respective areas, to provide the most benefit utilizing CDBG funds. The structure for the use of CDBG assistance is configured as a loan to provide maximum use of CDBG benefits for the following reasons:

CDBG loans can be structured as low as zero percent interest loan, to provide assistance while not placing a financial hardship on beneficiaries.
The program is prohibited from unduly enriching any individual, the loan ensures the repayment requirements to prevent this from occurring.
The lien ensures that the homeowner complies with the conditions of the CDBG agreement during the term of the loan.
While CDBG's intent is not to put a homeowner in the situation of being "upside-down" on his/her mortgage, the intent is for that homeowner to remain in the home for the long term and build that equity as the deferred mortgage is forgiven over time.

            COMMENT #5: I want to be sure that the language is clear that, after the Period of Affordability, loans can be forgiven, because I think that's a compromise, a position where you would have the ability to say, "Listen, Homeowner, we're going to spend $15…, $14,999 on your house; we're going to put a lien on it. We know that that's a greater loan-to-value than 100%, but we know that in 5 years we can forgive that loan." So those are the two pieces that I would ask for in terms of being an experienced rehabber and replacer.

            RESPONSE #5: Thank you for your comment. The recapture provisions that are contained within the application identify the terms of the CDBG loan. The loan term is in effect for the period of affordability, based on the amount of direct CDBG subsidy to the buyer. Once the period of affordability has expired the recapture provisions no longer apply.

            COMMENT #6: I'm going to move now to page 11 on Community Planning and I want to speak to issues of target areas. So the application by the municipality or the County asks to talk about target areas, and we, in Cascade County, are approved under this program from the earlier set of rules and we targeted two areas and we are finding that our business is coming from other areas, so I just want to make sure that there's enough flexibility within the rules that you can have a target area of an entire County. These are, by definition, sparsely populated areas and I think that if we are too defined in our target areas, we're not going to be able to help some people that definitely deserve the help; we just didn't put their town down as a target area.

            RESPONSE #6: Thank you for your comment. Commerce has intended the use of the CDBG funds to be flexible within a geographic area where funded activities support local planning efforts, such as housing plans or growth policies, and provide a recognizable impact of individual housing improvements. An eligible applicant could be a county with selected target areas to create an impact, in relation to their geographical attributes, for CDBG assisted activities. Interlocal agreements with incorporated municipalities within that county would be required to create a comprehensive approach to housing activities for that community.

            COMMENT #7: While we're on target area, I also want to make a plea that CDBG under this Program can be used once the County is approved as the Applicant. Here's the worst case scenario, if Cascade County is now approved as a contractor for this program; the subcontractor is NeighborWorks Great Falls; and look… what I'm worried about is that if I have a homeowner who needs a rehab in Cascade, Belt, Neihart, Monarch, Sand Coulee, Simms or Fort Shaw, I would have to have SEVEN different applications here. So, I just plead that you have an interlocal agreement situation that - once the County is approved - we have the ability to say to the City of Cascade, "Can you sign an agreement with Cascade County to use this Program?" This program again, because it's defined as the raw area of program, if we have to go to every municipality that needs a home or has a homeowner that needs rehab or replacement, I fear that it won't be used.

RESPONSE #7: See response to comment 6.

            COMMENT #8: On page 19 under Uniform Relocation Act, I think it's very difficult to comply with the area at the bottom which says, "When were Property and easement acquired?" because there is no specific project necessarily during this application process and so I don't know how I would answer that question except, "Well, there's no project, so there are no easements." That's an acceptable answer? Then, we're all fine and we don't have to worry about that one.

            RESPONSE #8: Thank you for your comment. That would be an acceptable answer in situations where there are no specifically identified activities. Uniform Relocation Act regulations will need to be documented at the time an activity is identified and prior to receiving assistance.

            COMMENT #9: The appendices: On Appendix E, there's a lot of boilerplate in all of Appendix E that is not the least bit related to Housing and this again, by definition, is a housing project and so, I just question whether all that boilerplate needs to be in there, when the title of the program is "Small Scale Housing." It's just a whole lot of additional things in there.

            RESPONSE #9: Thank you for your comment. As required by HUD regulations, all CDBG assisted projects are required to comply with Uniform Relocation Act requirements and follow the Residential Anti-displacement and Relocation Assistance Plan (RARAP) adopted by the state or follow a RARAP that is approved by the state. Appendix E provides a template for all applicants to ensure the minimum requirements are followed.

            COMMENT #10: I want to speak now to the issue of the manufactured housing requirements and the way I read the rules is: you can use it for placement or for connections, but you can't use it for the home itself. I want to be sure that a new septic system . . . and placement is included in those connections language and I want to argue that, in fact, we should be able to use part of this money for the new home itself.

            RESPONSE #10: Thank you for your comment. Commerce will allow connections, including connections to municipal water, sewer, gas and electrical utilities (as applicable) or sewer connections for an updated septic system to rehabilitate the housing unit to acceptable water and sewer standards. The intent of the program is to rehabilitate existing housing or new construction related to infill development to support planned growth and development in communities.

            COMMENT #11: I'm going to paint a scenario here: I've got an $80,000 project. The customer already owns the land under their home; they want to replace their home. CDBG can pay for demolition under the current rule. CDBG can pay for connections. Let's just assume this is not a Water District System, so we don't have to worry about septic and water; we just have to pay for the connection, right? Of course, we also have to do all the arrangements for the new home, et cetera. So, you're allowing the providers a maximum of 10% of the CDBG eligible costs to do all of the work, but only get paid 10% on the cost of the demolition, the hookups, and whatever comes under CDBG. I just argue that this is more expensive than that to the contractors that are working on this - the NeighborWorks of the world - so I would say we have to look at that.

RESPONSE #11: Thank you for your comment. CDBG funds used for administration are capped under federal law and are defined specifically as to the support of the project. CDBG encourages applicants to work with staff to ensure that administrative costs are separate from activity delivery costs to help provide maximum benefit to all parties involved in the project.

COMMENT #12: On page 45, mid-page, it says, the language is, "Owner Investment is returned first," and that's very curious language that I don't know much about, and what I would ask you to do is explain that more fully within the rules. I did read the "Owner Investment returned first" and - could be me - I'm still kind of coming back from vacation, but I just could not understand exactly what was happening there. Perhaps an off-line conversation with someone like me would suffice and it wouldn't need a change in the rules.

RESPONSE #12: Thank you for your comment. CDBG staff is available for one-on-one technical assistance and will be holding workshops in the future to help grantees comply with the regulatory requirements.

COMMENT #13: I want to completely compliment the Division and the Department. This is a great program; we just have to make it workable for the counties, the subcontractors and, most especially, the customers.

RESPONSE #13: Thank you for your support.

COMMENT #14: Could the eligible applicants be expanded to include CHDOs? Our experience as being the sub-recipient with smaller rural government entities as the grantee is that they have not the staff capacity, funding or experience to do even the minimal level of grant administration they are required to do, and it can cause them to say "never again" or to shy away from applying in the first place. Or could the guidelines allow the sub-recipient agreement to transfer almost all responsibilities and authority to the sub-recipient? That way draws can be submitted in a timely fashion and communications from the state staff are not delayed indefinitely by city/county staff who are perplexed or alarmed at the receipt.

RESPONSE #14: Thank you for your comment. CDBG regulations limit eligible applicants to non-entitlement cities, towns, and counties.

COMMENT #15: Would local Housing Authorities be eligible to apply (if non-tribal) or partner with the local jurisdiction?

RESPONSE #15: Thank you for your comment. See response to #14.

COMMENT #16: Page 3, Section II: First it states, "the local government is the applicant and grantee and decides the nature and extent of involvement in CDBG-assisted projects," then goes on to add "and establishes project roles and responsibilities in a project management plan." This is a perfect example of the challenges of using a small town or county staff to manage the grant or be the grantee. They will typically not have time, staff capacity knowledge, or experience to allow them to complete a "project management plan" in a timely fashion without putting an undue burden on their resources. Assuming the eligible recipients cannot be expanded to include a CHDO without the encumbrance of an overworked small government entity acting as a choking point in the middle between state staff and the people actually getting the work done, wouldn't it still be better to be more general in this paragraph, simply stating that the "project team" will establish the roles in a project management plan? That way the overworked small government entity could simply provide input and review the project management plan that the non-profit develops. Developing housing requires different skills and knowledge than developing a water treatment system or similar public works projects, and most small municipalities will just not have access to this on their own staff.

RESPONSE #16: Thank you for your comment. See response to #14.

COMMENT #17: Page 4, Section III: states "Projects involve the new construction or rehabilitation of single-family housing with 1 to 4 units, whether for rent or purchase or are owner-occupied by persons of low to moderate income." That is just a really limited scope of project. What if a community needs 6 units? What if townhouses would be better than single family? What if a four-plex or 8-plex would be the best solution for affordable housing in that community?

RESPONSE #17: Thank you for your comment. The intent of the program is to address housing needs that are on a "small-scale," or projects with 4 or less housing units. For projects larger than 4 units, applicants can apply to the CDBG Large-Scale Multi-family Housing Development and Rehabilitation program.

COMMENT #18: Page 4, Section III: states "accompanied by a budget, implementation schedule and inspection report completed by an individual with construction repair expertise." This implies that only rehab or conversion of existing structures is allowed – i.e., no new construction will be funded. If that is not the case, I suggest, inserting "when applicable" after "expertise."

RESPONSE #18: Thank you for your comment. See response to comment #10.

COMMENT #19: Page 4, Section III.A: New construction is not listed among the list of eligible activities. Is it the intention that new construction is not allowed as an eligible activity? It is mentioned elsewhere in the paragraph. New construction may be the best, most efficient and most fiscally responsible solution in many smaller communities. Combined with a municipality donation of land or reduction of impact fees, it could be a very attainable way to alleviate a lack of affordable housing in a smaller community. Is single-family intended to preclude the use of land trusts or "zero lot line" townhouse style development? Again some very efficient ways to develop affordable housing.

RESPONSE #19: Thank you for your comment. See response to comment #10.

COMMENT #20: Page 5, Section III: "The maximum per project award will be determined based on a Project Request Form that is accompanied by a budget, implementation schedule and inspection report completed by an individual with construction repair expertise." This seems like not a great idea. First off, assuming new construction is allowed as it seem to say it is in several places, nothing in this list indicates a good tool for determining reasonable new construction costs. Secondly, surely there should be some "per unit" limit or some percentage that the applicant and sub-recipient are required to provide from other funding sources? Yes, there definitely should be a maximum per unit limit, and some matching funds of some percentage should be required. This will also make the program easier to administer because staff will be better able to estimate, using a simple calculation based on how many applications (assuming each application has a maximum request) they have received, if/when the funding pool is likely to "run dry."

RESPONSE #20: Thank you for your comment. The intent of the program is to rehabilitate single family homes and eliminate health and safety deficiencies. This allows beneficiaries to address all health and safety deficiencies so they don't have to "choose" which health and safety issue to address. Therefore, CDBG has requested an inspection report to provide a framework for a budget to ensure individual beneficiaries receive comprehensive support.

COMMENT #21: Pages 4 and 5, Section II.A and B: last bullet requires smoke-free housing, but in the first paragraph of Section II.A it says the "funds are utilized for projects that will create or preserve homeownership." Further on in that same paragraph it says "single-family housing with 1 to 4 units, whether for rent or purchase or are owner-occupied by persons of low to moderate income." So there is some contradiction there; is this program for rental, home ownership or both, because only homeownership is identified at the beginning of the paragraph. If long term rental (vs. say, rent-to-own), is allowed, that first paragraph in Section II.A should include that. If the focus is really on home ownership to the exclusion of long term rental, the last sentence in the first paragraph of Section II.A needs to eliminate the reference to rental or otherwise clarify the limitations on rental. And if homeownership is the end goal, why does the last bullet of Section II.B even exist since it is about rental units? Naturally, a smoke-free policy would be difficult to implement in a homeownership program.

RESPONSE #21: Thank you for your comment. The first paragraph in Section III A on page 4 states, "Small-scale housing development and rehabilitation funds are utilized for projects that will create or preserve homeownership with a specific focus on addressing health and safety issues and ADA improvements for single family units." The word 'homeownership' will be changed to 'affordable housing.' Additionally, Section III B on page 5 encourages grantees to promote equitable, affordable housing consistent with the2015-2020 Montana Consolidated Plan goals to the maximum extent possible. This includes establishing and implementing smoke-free housing policies for CDBG-assisted rental units.

COMMENT #22: Pages 4 and 6: On page 4, the guidelines describe submitting an application and being eligible (but not funded) to request use of a pool of funding, for which a separate request would have to be made. But the public hearing process described in Section IV.A implies that one would have to have a specific project included in the application to become eligible for the pool of funding. That is confusing.

RESPONSE #22: Thank you for your comment. CDBG regulations require all applicants to hold two public hearings.

COMMENT #23: Page 7, Section IV.C.4: Another example of why smaller municipalities might not feel they can use this program. They are often unlikely to have staff available that can assess what it will take to comply with those regulations whereas the CHDO or experienced non-profit housing developer will have extensive experience in this. If the municipality MUST be the grantee for some reason, how about requiring or allowing the CHDO or non-profit to provide this certification. The reality is that they are likely to be the ones doing the majority of the work that will need to comply with the regulations anyway.

RESPONSE #23: Thank you for your comment. CDBG regulations require eligible applicants to be non-entitlement cities, towns, and counties. Local governments must also agree to comply with federal law and regulations when accessing federal funds. The program has encouraged creating partnerships with non-profits and CHDOs to carry out activities.

COMMENT #24: Page 7, Section IV.C.5: Again implies no new construction on vacant land would be allowed, unless "where applicable" is added to this requirement.

RESPONSE #24: Thank you for your comment. Please see response to comment #9.

COMMENT #25: The beginning of the plan seems to lay out the framework of a two part application. The first part gets the applicant approved to apply for use of this funding pool for five years. The second part seems to imply an application where a specific project is being described to ask for actual funding. However, as one reads further into the guidelines, that distinction gets murkier and murkier. In many locations the guidelines seem only to refer to an application where a specific project is included in the application. So it seems confusing that there would be this reference in the second paragraph of Section III that seems to describe a process that is not detailed anywhere else in the guidelines. After being "awarded" the ability to access this funding pool, how does one actually access the funding? Does one submit a "proposal" that restates all the project details (that they already had to include in the original application) in order to actually get the funding?

RESPONSE #25: Thank you for your comment. These application guidelines are the mechanism Commerce uses to qualify applicants to access CDBG Small-Scale Housing funding. This qualification will last for a period of five years, after which the grantee will need to reapply. During the five-year period, applicants will submit requests for individual activities (specific to a housing unit), which will receive funding. CDBG staff will be holding grant administration workshops to assist all potential applicants and grantees with the administration of this program.

COMMENT #26: Page 8, Section VI: Several places in this section the guidelines are establishing the roles and responsibilities for the grantee, something that earlier in the guidelines was stated to be a decision of the grantee. Please recognize that in most cases the non-profit housing developer is going to be doing all the activities described in these sections (all the actual "on the ground" work, in other words), so it would be helpful for the guidelines to say "development team" or "grantee/sub-recipient" or something to make it clear to the grantees that they are not going to have to do a boatload of work that they have neither the staff capacity nor the expertise to do.

RESPONSE #26: Thank you for your comment. Please see the response to comment #23.

COMMENT #27: Page 9, Section VI: Again, if rental is allowed, this section should be identified as "where applicable."

RESPONSE #27: Thank you for your comment.

COMMENT #28: Page 11, Section I, Community Planning: If a small community has not made a lot of progress in the community planning areas (i.e., no CIP, minimal Growth Policy, etc.) will that prevent the community from being successful in their quest for an award? We have worked in several small communities that just don't have those types of resources, but still have a critical need for affordable housing.

RESPONSE #28: Thank you for your comment. As outlined in the 2015-2020 Montana Consolidated Plan and the Annual Action Plans, Commerce has established goals and objectives to address the priority needs and specific objectives of the State, regarding the use of HUD funds. One of the goals and objectives is to support development of communities through comprehensive planning to ensure activities completed with CDBG funds support identified community goals and plans. Communities are strongly encouraged to identify needs and develop strategies to address them, regardless of size, through comprehensive planning. Commerce is committed to assisting communities develop these plans and provides a host of resources and technical assistance opportunities. No applicant will be considered ineligible solely on the basis that they have not made a lot of progress in community planning.

COMMENT #29: Page 25, Appendix D: Sorry to be a bit obsessed, but again, this wording "the applicant has the legal jurisdiction and authority to construct, finance, operate, and maintain," "the (Name of applicant) agrees to comply with all applicable parts of Title I of the Housing and Community Development Act of 1974, as amended" – the small local jurisdictions that take things literally are not going to feel comfortable with that kind of responsibility. They are unlikely to want to own and maintain the housing; they are unlikely to feel comfortable with what compliance with "Title I" means for them. These are all things they are going to rely on the non-profit for accomplishing and maintaining, and the non-profit should either be signing this jointly or there should a "higher level" resolution for the municipality, referring to the roles and responsibilities determined by their unique and individual management plan, and this, or one this detailed should be signed by the non-profit.

RESPONSE #29: Thank you for your comment. CDBG regulations require eligible applicants to be non-entitlement cities, towns, and counties. Local governments must also agree to comply with federal law and regulations when accessing federal funds. The program has encouraged creating partnerships with non-profits and CHDOs to carry out activities. Applicants that partner with non-profit organizations must create agreements to identify roles and responsibilities, respective of the long-term success of the project.

COMMENT #30: The concept that seemed to be expressed at the beginning of the guidelines (but isn't clearly carried through or described) that the municipality could do a basic almost "boiler plate" type of application to become eligible to apply for the funding pool, is a really neat idea. If the smaller municipalities could do a fairly simple low impact application and get "qualified" for funding, that gives them a tool, a "carrot" so to speak, with which they can interest non-profit housing developers to come and talk to them about specific projects, and allows the non-profit to shoulder the majority of the responsibility for all the development work and a more detailed "proposal application." But the guidelines go on to describe a pretty typical time and detail intensive application, at the end of which the applicant and sub-recipient don't even get any actual funding. So that seems a little unfortunate, like a great idea that just didn't get to "develop."

RESPONSE #30: Thank you for your comment. Please see the response to comment #25.

3. The department has adopted NEW RULE I (ARM 8.94.3731) as proposed.

/s/ MARTY TUTTLE /s/ DOUGLAS MITCHELL

MARTY TUTTLE DOUGLAS MITCHELL

Rule Reviewer Deputy Director

Department of Commerce

Certified to the Secretary of State October 17, 2016.