What is the Neighborhood Stabilization Program (NSP)?
The NSP is a new program that was authorized by the Housing and Economic Recovery Act of 2008 (HERA). HERA provides for a special, one time appropriation of $3.92 billion to the U.S. Department of Housing and Urban Development (HUD) to be used to help address the increasing problem of abandoned and foreclosed properties in communities across the country. Although the NSP has special rules, the funds are treated as Community Development Block Grant (CDBG) funds.
How Much Does North Carolina Receive?
Under HUD’s allocation formula, North Carolina is receiving slightly more than $63 million in NSP funds. Of this amount, about $5.5 million was directly allocated to Charlotte. The remaining amount, approximately $57.7 million, was allocated to the State of North Carolina. The state’s allocation will be administered by the Department of Commerce, Division of Community Assistance (DCA).
How Will DCA Distribute the State’s NSP Funds?
DCA is currently developing its plan for the NSP funds. Under the rules set by HUD, each state has to submit an action plan to HUD by December 1, 2008 that will detail how and where NSP funds will be spent (“Action Plan”). HUD will review the plans to ensure consistency with the NSP regulations and HERA—particularly the requirement that funds be targeted to areas of greatest need. Once approved, HUD will transfer funds to DCA and it can then use the funds in accordance with the terms of the Action Plan. It is expected that DCA will make subgrants of the NSP funds to local governments, other governmental entities and nonprofits. NSP requires that all funds be obligated within eighteen months and spent within four years, so once the Action Plan is accepted by HUD there will be a lot of urgency to get the money deployed quickly.
What Can NSP Funds be Used For?
NSP funds are intended to be used to stabilize neighborhoods that have been significantly impacted by the foreclosure crisis. To do this, subgrantees can:
- Buy abandoned or foreclosed homes
- Redevelop demolished or vacant properties
- Demolish or rehabilitate abandoned, foreclosed or blighted properties
- Provide down payment and closing cost assistance to low- and moderate-income homebuyers
- Reuse properties for affordable rental housing
- Establish and finance land banks to acquire, rehabilitate and resell abandoned, foreclosed or vacant homes or properties
In sum, there is an expectation that funds will be used primarily for housing initiatives. Under the HERA and NSP regulations, NSP funds can also be used to finance commercial activities to the extent they will benefit and stabilize eligible communities. It remains to be seen, however, whether this will be a permissible use under the Action Plan that DCA is developing.
All NSP activities must benefit low, moderate or middle-income individuals and families. Unlike the regular CDBG program, this means that activities can benefit individuals and families with incomes up to 120% of the area median income. Additionally, activities can qualify if they benefit communities where at least 51% of the residents have incomes at or below 120% of the area median income.
To assure an appropriate targeting of program funds, however, HERA and the NSP regulations provide that at least 25% of all NSP funds must be used “for the purchase and redevelopment of abandoned or foreclosed homes or residential properties that will be used to house families whose incomes do not exceed 50 percent of area median income.” In other words, 25% of all grant funds must be targeted to meeting the housing needs of very low-income families. This can be done through either home ownership or multi-family housing.
How Are the Terms “Abandoned” and “Foreclosed” Defined Under NSP
A priority use of NSP funds is to acquire and dispose of abandoned or foreclosed homes or residential properties in order to help families, stabilize neighborhoods and support local economies. As a result, it is critical to understand what types of properties qualify as abandoned or foreclosed under NSP.
To qualify as abandoned, a property must meet three conditions:
- Mortgage or tax foreclosure proceedings have been initiated;
- No mortgage or tax payments have been made for at least 90 days; and
- The property has been vacant for at least 90 days.
To qualify as foreclosed, the mortgage or tax foreclosure must be complete as a matter of state law. Generally, this requires that the title to the property has been transferred from the former owner through either (i) the foreclosure proceeding or (ii) the transfer of a deed in lieu.
If a property is either abandoned or foreclosed, then NSP funds may be used to acquire it. NSP funds may not be used to acquire any property that is not abandoned or foreclosed.
It is also important to note that if NSP funds are used to acquire a foreclosed property, then the program requires that the property be purchased at a discount to the current market appraised value of the property. In sum NSP requires that any individual property be purchased at a discount of at least 5% and the portfolio of properties purchased with NSP funds must be purchased at a discount of either 10% or 15% depending on the methodology used to determine the discount for each purchase transaction.
How Quickly do NSP Funds Need to be Used?
As noted above all grantees, including Charlotte and DCA, are required to obligate their NSP grant within 18 months of the date that they receive the funds from HUD. Under the NSP regulations, subgrantees do not have to meet any specific timing requirement with respect to obligating the subgrant funds that they receive from DCA, but it is possible that DCA might impose an additional requirement on its subgrantees. Further, all funds must be expended within 4 years of the date that they are received by the grantee from HUD. This requirement applies to both DCA and any subgrantee. Any funds not spent within this period will be recaptured and reallocated by HUD.
Can My Organization Receive a Developer’s Fee in Connection with NSP Activities?
Yes, as with the traditional CDBG program, the costs of projects can include a reasonable developer’s fee. HUD has confirmed that any such reasonable developer fee is not program income and thus can be retained by the developer as compensation for their expenses in connection with an NSP-funded project.
For more information about NSP, please contact:
Sherrill Hampton, Senior Vice President for Residential Development
(919) 835-6007, shampton@ncinitiative.org
Tara Kenchen, General Counsel & Vice President
(919) 835-6061, tkenchen@ncinitiative.org
Andrew Foster, Professor, Duke Law School & Counsel to the Initiative
(919) 613-7076, foster@law.duke.edu
Overview of the Neighborhood Stabilization Program
