COVID-19 has highlighted the need for additional affordable housing for households and communities struggling with long-term housing security. In March 2021, President Joe Biden signed the American Rescue Plan Act (ARPA) into law. ARPA provided $350 billion in payments to U.S. state, local and tribal governments to support budgets negatively impacted by COVID-19. While the U.S. Department of the Treasury previously encouraged the use of ARPA funds for affordable housing, state and local governments have sought additional guidance on the use of ARPA funds toward the construction or renovation of affordable housing.

On July 27, 2022, as part of a broader strategy to increase the nation’s housing supply and optimize the use of recovery funds in support of affordable housing, the U.S. Department of Treasury announced new guidance regarding the implementation of the recovery funds. The guidance expands eligible affordable housing uses and increases flexibility to use ARPA funds to finance long-term affordable housing loans. Below are a few notable takeaways from the guidance related to affordable housing.

1. Treasury continues to authorize use of ARPA funds to further affordable housing in response to COVID-19.

Governments continue to be able to use recovery funds they receive for the “development, repair, and operation of affordable housing and services or programs to increase long-term housing security.” For an affordable housing development to qualify for ARPA funding, the project must be responsive and proportional to the negative economic impacts of the pandemic. A development may meet this requirement if it increases the supply of long-term affordable housing for households negatively impacted by the pandemic.

Under the revised FAQs, Treasury now presumes that certain projects related to affordable housing investments are eligible uses. This includes projects that are eligible for funding under an expanded list of federal housing programs and projects for the development, repair or operation of affordable rental housing, subject to certain income and affordability requirements. To the extent a project fits into one of the two presumptions further described below, Treasury will presume that the project is eligible.

2. Two presumptively eligible uses of ARPA funds were added to the guidance.

Under the new guidance, Treasury expanded eligible affordable housing uses to maximize the availability of ARPA funds for affordable housing projects.

First, Treasury will presume that any project eligible for funding under certain federal housing programs is an eligible use of ARPA funding. Previously, the federal programs were limited to the HOME Investment Partnerships Program and the National Housing Trust Fund. The new guidance expands that list to other programs and agencies, including the Low-Income Housing Tax Credit (LIHTC) program, the Public Housing Capital Fund, Section 202 Supportive Housing for the Elderly Program, Section 811 Supportive Housing for Persons with Disabilities Program, project-based rental assistance, and Multifamily Preservation and Revitalization program. For presumptive eligibility related to a federal housing program, a project must comply with the applicable program’s requirements regarding (1) income restrictions, (2) the affordability period and related requirements for assisted units, (3) tenant protections and (4) housing quality standards.

Second, Treasury will presume that an investment in the development, repair or operation of any affordable rental housing unit is an eligible use of ARPA funds if the unit provides affordability for 20 years or more, imposed through a land-use restriction (or similar) agreement, for households at or below 65% of area median income (AMI). Additionally, Treasury does not require that the income limits and 20-year affordability covenant apply to specific units. These limits can instead be used to specify a number of units in the development as long as the applicable covenants specify the bedroom size mix.

Treasury clarified that these two presumptions are mutually exclusive and not dependent on each other as presumptively eligible uses.

3. Recovery funds can be used to provide long-term affordable housing loans in greater amounts than previously authorized.

Under previous guidance, ARPA funds could be used only to finance the cost of an affordable housing loan, not the full principal amount. The new guidance permits the use of ARPA funds to finance the full principal amount of a loan for an affordable housing project, subject to the following requirements: (1) the loan has a term of not less than 20 years; (2) the project or assisted units being financed have an affordability period of not less than 20 years after the project or assisted units are available for occupancy following receipt of ARPA funds; and (3) for loans that finance LIHTC properties, the owner must (i) waive the right to request a qualified contract and (ii) agree to repay the loan in full at the time the project becomes noncompliant.

The amount of the loan will depend on when the loan will mature. If a loan matures or is forgiven on or before Dec. 31, 2026, governments can use ARPA funds to finance the principal of the loan. If a loan matures after Dec. 31, 2026, ARPA funds can be used only for the projected cost of the loan. The projected cost of the loan uses the estimated present value of the cash flows from the recipient (excluding administrative expenses), less the estimated present value of cash flows to the recipient resulting from a loan, discounted at the recipient’s cost of funding and discounted to the time of disbursement of the loan.

4. For eligible projects, ARPA funds can pay for predevelopment costs and fill gaps left by other funding sources.

ARPA funds may be combined with other sources of funds to fill funding gaps for new construction and rehabilitation of existing affordable housing projects. For example, ARPA funds may be used for site work and other predevelopment activities related to the construction of new affordable housing projects. Recipients may also use ARPA funds to acquire land for future development or acquire land within existing programs for purposes of affordable housing investments.

ARPA funds may be used to acquire property to reuse it as affordable housing. Among other uses, ARPA funds may be applied to the acquisition of market-rate rental properties or commercial properties and the rehabilitation or conversion of such properties into affordable housing. For existing properties, ARPA funds may be used to pay for retrofitting and weatherization of properties to increase energy efficiency.

5. Affordable housing projects outside the scope of new guidance regarding presumptive eligibility still may be eligible for recovery funds.

Affordable housing projects that fall outside the scope of the presumptive eligible uses still may be eligible for use of recovery funds if they are related and are reasonably proportional to addressing the negative economic impacts of the pandemic and otherwise meet the final rule’s requirements. For example, Treasury guidance indicates that, in certain real estate markets, gaps in financing for units serving households between 50% and 80% of AMI and/or significantly higher than average housing costs relative to AMI have led individuals in this income threshold to be negatively impacted by the pandemic. While this does not fall directly into the presumptive eligibility categories described above, it still may be eligible for ARPA funding.

Additionally, to support homeownership and assist borrowers who experience financial stress, recipients of recovery funds may offer down payment assistance, such as contributions to a homeowner’s equity at origination or to establish a post-closing mortgage reserve account on behalf of the borrower that can be used to make a missed or partial mortgage payment at any point during the life of the loan.

In addition to its latest guidance, Treasury released a how-to guide to help governments combine ARPA funds with other sources of federal funding.