Housing Services:
Uses of Funds

All normal and reasonable development costs directly associated with the acquisition, refinancing, rehabilitation or construction of a qualified project are eligible for direct financial assistance funds. All project costs must compare favorably with industry standards and other PDC funded projects. The PDC has established more specific standards for certain development expenses as outlined below.

Replacement Reserves

The PDC requires annual contributions to a separate replacement reserve for all housing projects receiving direct financial assistance funds (see Project Operations Guidelines, Replacement Reserves). The annual contribution is expected to be at least $250 per unit for new construction and $300 per unit for rehabilitation projects. Sufficient funds should be available to maintain the project according to projections from the HDC Replacement Reserve model or a PDC approved equivalent. PDC staff, based upon the projected reserve balances from initial capitalized reserves and from annual reserve contributions, will approve the amount of the capitalized replacement reserve. The funding amount will be based on the timing of anticipated repairs and the estimated repair costs. Projects where all of the common areas and unit components are not rehabilitated or that have less sustainable design features will be expected to have higher replacement reserve levels.

To facilitate accurate asset management reporting to the PDC, the Borrower should account for the replacement reserves separately from other accounts.

Purchase Price

The eligible purchase price of a property for land or existing housing may not exceed the documented “as is" value of the property as per an appraisal acceptable to the PDC.

Contingency – Construction

Project Sponsors are required to establish a construction contingency fund for any unforeseen costs or required building code corrections. An amount not less than 4% and not greater than 10% of the budgeted costs of all improvements is to be included in the development budget to cover cost overruns and required construction changes during the construction period. If at any time prior to completion of construction, the PDC determines that the unused portion of the contingency reserve is unreasonably low in relation to the amount of work remaining to complete the project, the PDC may:

1. Restrict or prohibit the use of the remaining portion of the construction contingency, or
2. Require the Project Sponsor to make a cash deposit within a specified time period to bring the construction contingency up to a reasonable level, or
3. Reduce the maximum allowable developer fee for the project or hold back developer fee payments.

Developer Fees - Capitalized

The capitalized fee identified in the project's development budget should represent reasonable compensation. The PDC guidelines relative to appropriate, capitalized fees are as follows:*

*Please note that PDC includes project management and/or consultant fees in the calculations of allowable developer fees.

PDC considers the following factors in determining maximum allowable, capitalized developer fees:

1. Factors expected to decrease Developer Fee Percentage from the midpoint of applicable range:
   1. Limited scope of work.
   2. Project Sponsor provides minimum investment.
   3. Limited design or financing complexity for project size.
   4. Average development costs, efficiencies, and service models.
   5. Maximized projected cash flow.
2. Factors expected to increase Developer Fee Percentage from the midpoint of applicable range:
   1. Broad scope of work.
   2. Significant Project Sponsor/investor capital at risk.
   3. Complex project design or financing for the project size.
   4. Demonstrated cost efficiencies and exceptional resident service models.
   5. Limited projected cash flow.

The criteria included in each of the above categories for evaluating developer fees are included in the appendix of this document.

Developer Fee Disbursement Schedule

A developer fee is paid at project completion. However, reasonable releases of the fee for work actually performed and completed are allowed throughout the project, provided satisfactory benchmarks are reached, in amounts acceptable to the PDC, and funds provided by participating lenders are retained to ensure developer performance and project completion. Generally, the following schedule of developer fee releases apply:

1. 35% of the scheduled fee at loan settlement or notice to proceed with construction.
2. 55% of the scheduled fee to be disbursed during the construction period on an agreed pro rata basis.
3. 10% of the scheduled fee to be retained as an additional project contingency and released upon satisfactory PDC project closeout and satisfaction of developers’ agreement.

Developer Fees – Other

Developers are not precluded from receiving additional compensation which is appropriate and customary for design work, real estate broker fees, property management fees, etc., provided such services are declared and their costs determined reasonable by the PDC.

When the developer has previously been compensated for predevelopment activities, the developer fee will be adjusted to reflect this early release of compensation.

In some cases, including unanticipated cost increases, it may be necessary or desirable for a developer to defer a portion of the PDC’s allowable capitalized developer fee. In these cases, the interest rate, which the developer may charge on the outstanding principal balance of the deferred developer promissory note, may not exceed the rate of the primary, construction mortgage on the project.

Reserve – Lease Up

Multi-family projects that are substantially vacant or to be newly constructed have risks associated with achieving full rent up after the completion of construction. Project Sponsors must demonstrate that sufficient liquidity or revenue will be available to operate the property during the marketing/rent up period. Any projected deficit at the time of lease-up must be offset by cash reserves, an amount budgeted in a construction loan, or a combination of both as acceptable to the PDC and participating lenders.

Operating Reserves

Three months of Gross Revenues should be included as a line item for operating reserves in development/rehabilitation budgets. The conditions for use of the operating reserves to meet temporary operating shortfalls should be agreed upon by all lenders and the Borrower before funding. If the operating reserve is reduced by approved withdrawals, the balance must be replenished by the Borrower as a priority payment. The funds should be replaced within 24 months unless the lenders approve a longer period.

To facilitate accurate asset management reporting to the PDC, the Borrower should account for the operating reserves separately from other accounts.

Ineligible Uses of PDC Funds

The following costs and expenditures are ineligible for direct financial assistance funds and will not be considered as part of the development budget when calculating the direct financial assistance required by the project:

1. Acquisition costs in excess of the appraised value,
2. Development fees in excess of the maximum allowable fee,
3. Project costs that exceed market value or are not necessary to accomplish public objectives,
4. Organizational capacity building costs,
5. Organizational expenses (unless specific to development of a project),
6. Training,
7. Staffing costs,
8. Equipment,
9. Personal property; and/or
10. Trade fixtures and improvements not directly related to and used by the residential portion of the project, except for PDC approved tenant improvements in commercial spaces of Mixed-Use projects.

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