**Guide to Neighborhood Stabilization**

**Program (NSP) Eligible Uses**

*This Guide is designed to present the activities that are eligible to
be assisted under the Neighborhood Stabilization Program (NSP) found in
Title III of Division B of the Housing and Economic Recovery Act of
2008. For guidance on how to apply for NSP funds, consult the [NSP Quick
Guide for
Grantees](http://www.hud.gov/offices/cpd/communitydevelopment/programs/neighborhoodspg/nspquickguide.doc)
and the [Application and
Checklist](http://www.hud.gov/offices/cpd/communitydevelopment/programs/neighborhoodspg/nsptemplate.doc).*

[**I.** **GENERAL INFORMATION** 1](#__RefHeading___Toc210792692)

[**1.** **LOW AND MODERATE INCOME REQUIREMENT**
1](#__RefHeading___Toc210792693)

[**2.** **PRIORITY FOR AREAS OF GREATEST NEED**
3](#__RefHeading___Toc210792694)

[**3.** **CONTINUED AFFORDABILITY** 3](#__RefHeading___Toc210792695)

[**4.** **TIMELY USE AND EXPENDITURE OF FUNDS**
4](#__RefHeading___Toc210792696)

[**5.** **INFORMATION FOR STATES** 4](#__RefHeading___Toc210792697)

[**II.** **ELIGIBLE USES** 5](#__RefHeading___Toc210792698)

[**1.** **FINANCING MECHANISMS** 5](#__RefHeading___Toc210792699)

[**2.** **PURCHASE AND REHABILITATION** 5](#__RefHeading___Toc210792700)

[**3.** **LAND BANKS** 9](#__RefHeading___Toc210792701)

[**4.** **DEMOLITION** 9](#__RefHeading___Toc210792702)

[**5.** **REDEVELOPMENT** 10](#__RefHeading___Toc210792703)

[**6.** **ADMINISTRATION AND PLANNING COSTS**
11](#__RefHeading___Toc210792704)

[**7.** **OTHER USES** 11](#__RefHeading___Toc210792705)

I.  []{#__RefHeading___Toc210792692 .anchor}**GENERAL INFORMATION**

    []{#__RefHeading___Toc210792693 .anchor}**1. [LOW AND MODERATE
    INCOME REQUIREMENT ]{.underline}**

(Housing and Economic Recovery Act §2301(f)(3)(A)(i) and (ii))

**[Requirements for the use of NSP funds:]{.underline}**

> \(1\) All of the funds made available under this section are to be
> used with respect to individuals and families whose incomes do not
> exceed 120% of area median income.
>
> \(2\) Not less than 25% of these funds are to be used for the purchase
> and redevelopment of abandoned or foreclosed upon homes or residential
> properties that will be used to house individuals or families whose
> incomes do not exceed 50% of area median income.

[]{.mark}

Note that NSP redefines and supersedes the definition of "low- and
moderate-income" of the CDBG program by allowing households whose
incomes exceed 80% but are no greater than 120% of area median income to
qualify for NSP funds. HUD will refer to this new income group as
"middle income," but continue to use the CDBG definitions of
"low-income" and "moderate-income." HUD will use the term "low-,
moderate- and middle-income" (LMMI) to refer to the national objective
of the program.

For more information on the 120% of area median income requirement
consult http://www.huduser.org/publications/commdevl/nsp.html.

[]{.mark}

**[Meeting the National Objective:]{.underline}**

[NSP allows for the use of *only* the LMMI national
objective.]{.underline}

-   Activities may NOT qualify under NSP using the "prevent or eliminate
    slums or blight" or "address urgent community development needs"
    objectives as allowed in the overall benefit provisions of the HCD
    Act and the CDBG regulations.

-   Note that although NSP changes the low and moderate income
    requirement level of the CDBG program, the remaining requirements of
    24 CFR 570.208(a) and 570.483(b) regarding area benefit, housing,
    and limited clientele benefit remain unchanged.

[Examples of how funds can be used to meet the national
objective]{.underline}:

**Housing Activities**: Providing or improving permanent residential
structures that will be occupied by a household whose income is at or
below 120% of area median income (LMMH).

-   Acquisition, Rehabilitation, Rental, Sale, Conversion, Construction
    of Housing Units

-   Homeownership Assistance

-   Infrastructure for housing as part of redevelopment

-   All Units must be occupied by those meeting the low- and
    moderate-income requirement.

**Area Benefit Activities:** Benefiting all the residents of a primarily
residential area in which at least 51% of the residents have incomes at
or below 120% of area median income (LMMA).

-   Grantees must identify the service area of each NSP-funded activity.

-   HUD will provide data on the percentage of low-, moderate- and
    middle income persons, by census tracts and block groups.

> See http://www.huduser.org/publications/commdevl/nsp.html []{.mark}

-   Demolition, Acquisition, Lank Banks if maintenance and demolition
    also take place

-   No use of the "upper quartile" provision for exception criteria
    communities.

**Limited Clientele Activities**: Serving a limited clientele whose
incomes are at or below 120 % of area median income (LMMC).

-   Housing counseling for prospective purchasers/tenants

-   Public facilities such as emergency shelters, group homes

**[Meeting the 50% of area median income requirement:]{.underline}**

-   The requirement applies to each grant, not to the NSP program as a
    whole, nor each project or activity, nor each subrecipient.

```{=html}
<!-- -->
```
-   Compliance based on dollars, not number of units

-   Principal way to comply will be through rental housing:

```{=html}
<!-- -->
```
-   New construction or conversion

-   Acquisition

-   Rehabilitation

    []{#__RefHeading___Toc210792694 .anchor}**2. [PRIORITY FOR AREAS OF
    GREATEST NEED]{.underline}**

(Housing and Economic Recovery Act §2301(c)(2))

-   In distributing NSP funds, grantees are to give priority emphasis
    and consideration to those metropolitan areas, metropolitan cities,
    urban areas, rural areas, low- and moderate-income areas, and other
    areas with the greatest need, including those---

> \(A\) with the greatest percentage of home foreclosures;
>
> \(B\) with the highest percentage of homes financed by subprime
> mortgage related loan;
>
> \(C\) identified by the State or unit of general local government as
> likely to face a significant rise in the rate of home foreclsosures.

-   HUD has developed a foreclosure and abandonment risk score to assist
    grantees in targeting the areas of greatest need within their
    jurisdictions.  Grantees may wish to consult
    [http://www.huduser.org/publications/commdevl/nsp.html]{.underline}

    []{#__RefHeading___Toc210792695 .anchor}**3. [CONTINUED
    AFFORDABILITY]{.underline}**

-   Grantees shall ensure, to the maximum extent practicable and for the
    longest feasible term, that the sale, rental, or redevelopment of
    abandoned and foreclosed upon homes and residential properties under
    this section remain affordable to individuals or families whose
    incomes do not exceed 120 percent of area median income or, for
    units originally assisted with funds under the requirements of
    section 2301(f)(3)(A)(ii), to remain affordable to individuals and
    families whose incomes do not exceed 50 percent of area median
    income.

-   HUD will consider any grantee adopting the HOME program standards at
    24 CFR 92.252(a), (c), (e) and (f), and 92.254 to be in minimal
    compliance with this affordability standard and expects any other
    standards proposed and applied by a grantee to be enforceable and
    longer in duration.

-   If NSP funds assist a property that was previously assisted with
    HOME funds, but on which the affordability restrictions were
    terminated through foreclosure or transfer in lieu of foreclosure
    pursuant to 24 CFR part 92, the grantee must revive the HOME
    affordability restrictions for the greater of the remaining period
    of HOME affordability or the continuing affordability requirements
    of this notice.

    []{#__RefHeading___Toc210792696 .anchor}**4.** **[TIMELY USE AND
    EXPENDITURE OF FUNDS]{.underline}**

(Housing and Economic Recovery Act §2301(c)(1))

-   Grantees must use NSP funds within eighteen months of receipt.

[Relevant Definition:]{.underline}

*Use for the purposes of section 2301(c)(1)*. Funds are used when they
are obligated by a

state, unit of general local government, or any subrecipient thereof,
for a specific NSP activity; for example, for acquisition of a specific
property. Funds are obligated for an activity when orders are placed,
contracts are awarded, services are received, and similar transactions
have occurred that require payment by the state, unit of general local
government, or subrecipient during the same or a future period. Note
that funds are not obligated for an activity when subawards (e.g.,
grants to subrecipients or to units of local government) are made.

-   A grantee will be deemed to have received its NSP grant at the time
    HUD signs its NSP grant agreement (or amendment thereto if funds are
    later reallocated to the grantee).

-   Grantees must be expend on eligible NSP activities an amount equal
    to or greater than the initial allocation of NSP funds within four
    years of receipt of funds.

    []{#__RefHeading___Toc210792697 .anchor}**5. [INFORMATION FOR STATES
    ]{.underline}**

```{=html}
<!-- -->
```
-   Unlike the CDBG program, states may distribute funds to or within
    any jurisdiction within the state (e.g. entitlement communities and
    Indian tribes) that is among those with the greatest need, even if
    the jurisdiction is among those receiving a direct formula
    allocation of funds from HUD under the regular CBDG program or NSP.

-   Also, unlike the State CDBG program, a state receiving NSP funds may
    carry out NSP activities directly for some or all of its assisted
    grant activities in the same manner that entitlement communities are
    permitted under 24 CFR 570.200(f). Such activities include, but are
    not limited to, carrying out activities using its own employees,
    procuring contractors, private developers, and providing loans and
    grants through nonprofit subrecipients (including local governments
    and other public nonprofits such as regional or local planning or
    development authorities and public housing authorities).

II. []{#__RefHeading___Toc210792698 .anchor}**ELIGIBLE USES**

(Housing and Economic Recovery Act §2301(c)(3))

[]{#__RefHeading___Toc210792699 .anchor}**1. [FINANCING
MECHANISMS]{.underline}**

*§2301(c)(3)(A) establish financing mechanisms for purchase and
redevelopment of foreclosed upon homes and residential properties,
including such mechanisms as soft-seconds, loan loss reserves, and
shared-equity loans for low- and moderate- income homebuyers;*

[Relevant Definition:]{.underline}

*Foreclosed*. A property "has been foreclosed upon" at the point that,
under state or local law, the mortgage or tax foreclosure is complete.
HUD generally will not consider a foreclosure to be complete until after
the title for the property has been transferred from the former
homeowner under some type of foreclosure proceeding or transfer in lieu
of foreclosure, in accordance with state or local law.

[Correlated Eligible Activities from the CDBG Entitlement
Regulations]{.underline}

-   As part of an activity delivery cost for an eligible activity as
    defined in 24 CFR 570.206.

-   Financing mechanisms used to carry out CDBG eligible activities
    listed below.

    []{#__RefHeading___Toc210792700 .anchor}**2. [PURCHASE AND
    REHABILITATION ]{.underline}**

*§2301(c)(3)(B) purchase and rehabilitate homes and residential
properties that have been abandoned or foreclosed upon, in order to
sell, rent, or redevelop such homes and properties;*

[Relevant Definitions:]{.underline}

*Abandoned*. A home is abandoned when mortgage or tax foreclosure
proceedings have been initiated for that property, no mortgage or tax
payments have been made by the property owner for at least 90 days, AND
the property has been vacant for at least 90 days.

*Current market appraised value*. The current market appraised value
means the value of a foreclosed upon home or residential property that
is established through an appraisal made in conformity with the
appraisal requirements of the URA at 49 CFR 24.103 and completed within
60 days prior to an offer made for the property by a grantee,
subrecipient, developer, or individual homebuyer.

[Acquisition:]{.underline}

-   Section 2301(d)(1) of HERA requires any purchase of a
    foreclosed-upon home or residential property under NSP be at a
    discount from the current market-appraised value of the home or
    property. Such discount shall ensure that purchasers are paying
    below-market value for the home or property.

-   For mortgagee foreclosed properties, grantees must seek to obtain
    the "maximum reasonable discount" from the mortgagee, taking into
    consideration likely "carrying costs" of the mortgagee if it were to
    not sell the property to the grantee or subrecipient.

-   Section 301 of the URA, regarding just compensation, does not apply
    to voluntary acquisitions.

-   All acquisitions of property under NSP require an appraisal for
    purposes of determining the statutory purchase discount.

-   For individual purchase transactions, the purchase discount is to be
    at least 5% from the current market appraised value of the home or
    property.

-   For purchase transactions in the aggregate, the average purchase
    discount depends on how the purchase discount for an individual
    property is determined.

    -   The average purchase discount shall be at least 10% if the
        State, unit of general local government, or subrecipient
        determines the discount for each purchase transaction through
        use of a methodology that results in a discount equivalent to
        the total carrying costs that would be incurred by the seller if
        the property were not purchased with NSP funds (provided the
        discount is at least 5%).

        -   Such methodology shall provide for an analysis of the
            estimated holding period for the property and the nature and
            amount of the carrying costs of holding the property for
            this period.

        -   Carrying costs shall include, but not be limited to: taxes,
            insurance, maintenance, marketing, overhead, and interest.

    -   If this methodology is not used, the minimum average discount
        shall be at least 15%.

```{=html}
<!-- -->
```
-   An NSP recipient may NOT provide NSP funds to another party to
    finance an acquisition of tax foreclosed (or any other) properties
    from itself, other than to pay the necessary and reasonable costs
    related to the appraisal and transfer of title.

-   Grantees that are contemplating using NSP funds to assist an
    acquisition involving an eminent domain action are advised to
    consult legal counsel before taking action, as this may present
    problems with the Takings Clause of the Fifth Amendment to the U.S.
    Constitution and prior Supreme Court rulings.

-   HUD is not specifying alternative requirements to the relocation
    assistance provisions at 42 U.S.C. 5304(d).

```{=html}
<!-- -->
```
-   Grantees are encouraged to acquire and redevelop FHA foreclosed
    properties. HUD provides information on such properties at
    <http://www.hud.gov/offices/hsg/sfh/reo/reohome.cfm>. Grantees may
    also contact their local HUD FHA office for further information.

[Rehabilitation]{.underline}

-   Any rehabilitation of a foreclosed upon home or residential property
    shall be to the extent necessary to comply with applicable laws,
    codes and other requirements relating to housing safety, quality,
    and habitability, in order to sell, rent, or redevelop such homes
    and properties. In their substantial amendment, grantees must define
    their housing rehabilitation standards that will apply to NSP
    assisted activities.

-   Funds may be used for preservation, improving energy efficiency or
    conservation, or providing renewable energy source(s).

    -   HUD encourages grantees to strategically incorporate modern
        green building and energy efficiency improvements to provide for
        long-term affordability and increased sustainability and
        attractiveness of housing and neighborhoods.

-   Grantees may fund costs, such as sales costs, closing costs, and
    reasonable developer's fees, related to NSP-assisted housing,
    rehabilitation, or construction activities.

-   NSP funds may be used to redevelop acquired property for
    nonresidential uses, such as a public parks or mixed residential and
    commercial use.

-   Grantees may rehabilitate property to be operated as rental housing
    by the grantee, by a subrecipient, by a lessee or by a purchaser.
    Grantees should note that the costs of purchase, rehabilitation,
    conversion and sale of such properties are eligible NSP activities,
    but the expenses of actually operating the rental housing (such as
    maintenance, insurance, deficits in monthly operating income) and
    tenant-based rental subsidies are not eligible NSP activities.

[Sale]{.underline}

-   If an abandoned or foreclosed upon home or residential property is
    to be sold to an individual as a primary residence, no profit may be
    earned on such sale.

-   Section 2301(d)(2) directs that the sale of such property shall be
    in an amount equal to or less than the cost to acquire and redevelop
    or rehabilitate such home or property up to a decent, safe, and
    habitable condition.

-   The maximum sales price for a property is determined by aggregating
    all costs of acquisition, rehabilitation, and redevelopment
    (including related activity delivery costs, which generally include,
    among other things, costs related to the sale of property).

-   In determining the sales price, HUD will NOT consider the costs of
    boarding up, lawn mowing, maintaining the property in a static
    condition, or, in the absence of NSP-assisted rehabilitation or
    redevelopment, the costs of completing a sales transaction or other
    disposition to be redevelopment or rehabilitation costs.

-   Each NSP-assisted homebuyer is required to receive and complete at
    least eight hours of homebuyer counseling from a HUD-approved
    housing counseling agency before obtaining a mortgage loan.

-   Grantees must ensure that homebuyers obtain a mortgage loan from a
    lender who agrees to comply with the bank regulators' guidance for
    non-traditional mortgages.

-   Grantees are cautioned against providing or permitting homebuyers to
    obtain subprime mortgages for whom such mortgages are inappropriate.

[Correlated Eligible Activities from the CDBG Entitlement
Regulations]{.underline}

-   24 CFR 570.201

> \(a\) Acquisition
>
> \(b\) Disposition
>
> \(i\) Relocation
>
> \(n\) Direct homeownership assistance to persons whose incomes do not
> exceed 120% of median income.

-   24 CFR 570.202 Eligible rehabilitation and preservation activities
    for homes and other residential properties. Note that rehabilitation
    may include counseling for those seeking to take part in the
    activity.

    []{#__RefHeading___Toc210792701 .anchor}**3. [LAND
    BANKS]{.underline}**

> *§2301(c)(3)(C) establish land banks for homes that have been
> foreclosed upon;*

[Relevant definitions:]{.underline}

*Land bank*. A land bank is a governmental or nongovernmental nonprofit
entity established, at least in part, to assemble, temporarily manage,
and dispose of vacant land for the purpose of stabilizing neighborhoods
and encouraging re-use or redevelopment of urban property. For the
purposes of the NSP, a land bank will operate in a specific, defined
geographic area. It will purchase properties that have been abandoned or
foreclosed upon and maintain, assemble, facilitate redevelopment of,
market, and dispose of the land-banked properties. If the land bank is a
governmental entity, it may also maintain abandoned or foreclosed
property that it does not own, provided it charges the owner of the
property the full cost of the service or places a lien on the property
for the full cost of the service.

[Lank Bank Uses:]{.underline}

-   A land bank may not hold a property for more than ten years without
    obligating the property for a specific, eligible redevelopment in
    accordance with NSP requirements. HUD does not believe that holding
    property alone is sufficient to stabilize most neighborhoods.

-   The grantee must determine the actual service area benefiting from a
    land bank's activities.

-   Grantees may pursue other Land Bank activities, however, NSP funds
    may only be used for acquisition

-   For more information on land banks and examples of best practices
    visit:
    <http://www.hud.gov/offices/cpd/about/conplan/foreclosure/landbanks.cfm>

[Correlated Eligible Activities from the CDBG Entitlement
Regulations:]{.underline}

-   24 CFR 570.201

> \(a\) Acquisition
>
> \(b\) Disposition

[]{#__RefHeading___Toc210792702 .anchor}**4. [DEMOLITION]{.underline}**

> *§2301(c)(3)(D) demolish blighted structures;*

[Relevant definition:]{.underline}

*Blighted structure*. A structure is blighted when it exhibits
objectively determinable signs of deterioration sufficient to constitute
a threat to human health, safety, and public welfare.

[General information:]{.underline}

-   The national objectives related to prevention and elimination of
    slums and blight and addressing urgent community development needs
    (24 CFR 570.208(b) and (c) and 570.483(c) and (d)) are not
    applicable to NSP-assisted activities.

-   NSP grantees will NOT be required to meet the requirements of 42
    U.S.C. 5304(d) as implemented at 24 CFR 42.375, which mandates
    one-for-one replacement of low- and moderate-income dwellings units
    that are demolished or converted for activities assisted with NSP
    funds.

[Correlated Eligible Activities from the CDBG Entitlement
Regulations]{.underline}

-   24 CFR 570.201 (d) Clearance, for blighted structures only

    []{#__RefHeading___Toc210792703 .anchor}**5.
    [REDEVELOPMENT]{.underline}**

> *§2301(c)(3)(E) redevelop demolished or vacant properties*

-   Grantees may fund costs, such as sales costs, closing costs, and
    reasonable developer's fees, related to NSP-assisted housing,
    rehabilitation, or construction activities.

-   New construction of housing and building infrastructure for housing
    is an eligible use.

-   Grantees may redevelop property to be used as rental housing.

-   Grantees are encouraged to acquire and redevelop FHA foreclosed
    properties. HUD provides information on such properties at
    <http://www.hud.gov/offices/hsg/sfh/reo/reohome.cfm>. Grantees may
    also contact their local HUD FHA office for further information.

[Correlated Eligible Activities from the CDBG Entitlement
Regulations]{.underline}

-   24 CFR 570.201

> \(a\) Acquisition
>
> \(b\) Disposition
>
> \(c\) Public facilities and improvements
>
> \(e\) Public services for housing counseling, but only to the extent
> that counseling beneficiaries are limited to prospective purchasers or
> tenants of the redeveloped properties
>
> \(i\) Relocation
>
> \(n\) Direct homeownership assistance (for persons whose income does
> not exceed 120% of median income)

-   24 CFR 570.204 Community based development organizations

-   New housing construction

    []{#__RefHeading___Toc210792704 .anchor}**6. [ADMINISTRATION AND
    PLANNING COSTS]{.underline}**

(Housing and Economic Recovery Act §2301(c)(3))

-   An amount of up to 10% of an NSP grant provided to a jurisdiction
    and up to 10% of program income earned may be used for general
    administration and planning activities as defined at 24 CFR 570.205
    and 206.

-   For all grantees, including states, the 10% limitation applies to
    the grant as a whole.

-   There is no state match requirement for administrative costs as
    exists in the CDBG program.

-   Activity delivery costs, as defined in 24 CFR 570.206, may be
    charged to the particular activity performed above and will not
    count as general administration and planning costs.

-   [Pre-award Costs:]{.underline} A grantee may incur pre-award costs
    necessary to develop the NSP Application and undertake other
    administrative and planning actions necessary to receive the NSP
    grant, in compliance with 24 CFR 570.200(h). States may allow
    subrecipients to incur pre-award costs pursuant to 24 CFR
    570.489(h).

    []{#__RefHeading___Toc210792705 .anchor}**7. [OTHER
    USES]{.underline}**

```{=html}
<!-- -->
```
-   If grantees would like to use funds for activities not specifically
    addressed, grantees must make a written request to their local HUD
    field office for approval. Such request must demonstrate that the
    proposed activity constitutes an eligible use under the NSP.

-   If not otherwise stated, if an activity is ineligible under CDBG, it
    is ineligible under the NSP program.

-   HUD will not consider requests to allow foreclosure prevention
    activities, such as refinancing mortgages and paying back taxes; or
    to allow demolition of structures that are not blighted; or to allow
    purchase of residential properties and homes that have not been
    abandoned or foreclosed upon as provided in HERA and defined in this
    notice