News & Events

 

On June 20, 2007, the U.S. Department of Housing and Urban Development (“HUD”) Office of Public and Indian Housing issued Notice PIH-2007-15 setting forth guidelines for affordable housing activities by or involving public housing authorities (“PHAs”) or their related affiliates and instrumentalities. The Notice in particular discusses allocation and sources of funds for development, conflicts of interest, procurement, disposition of HUD property, encumbrances or guarantees of HUD property, and what corrective actions a PHA can take if it has made a mistake.

 

The Notice also highlights that PHAs can run into issues either through their own activities or through activities of an affiliated entity. Many PHAs are affiliated with a separate nonprofit organization that has the same mission as the PHA. Sometimes officers of the PHA are also officers of the affiliated nonprofit. Because rules applicable to PHAs may apply differently to an affiliated nonprofit-based on the nature of these relationships, the Notice explains how differences in the relationship between the PHA and the affiliated nonprofit can impact how the PHA must operate. The Notice addresses these situations by defining an affiliated nonprofit as either instrumentalities or affiliates.

 

Instrumentalities are entities whose assets, operations, and management are effectively and legally controlled by the PHA, and which utilize public housing funds or assets to carry out public housing development activities of the PHA. HUD will generally subject an instrumentality to the same requirements as the related PHA. This means that if the board of directors of the nonprofit is controlled by the same board members or officers that control the PHA, the entity will likely be an instrumentality if it is involved in public housing.

 

Affiliates are related entities which (i) are not an instrumentality, (ii) a PHA has control over in terms of organization, administration, or program activities, and (iii) utilize public housing funds or assets to carry out public housing development activities.

 

In either definition, the Notice only applies to affiliated entities that use public housing funds or public housing assets. Affiliated entities that do not use public housing funds or assets are not generally subject to the rules in the Notice (with one exception being the prohibition of conflicts of interest).  In addition to the instrumentality/affiliate distinction, other issues discussed in the Notice include:

 

Generally, public housing funds may only be used for development, including the formation of instrumentalities or affiliates, if public housing units will be incorporated in the development. Where staff, facilities, equipment, or other resources are shared between a PHA and an affiliate/instrumentality, or between the public housing program and nonpublic housing programs, the costs must be equitably allocated to each entity or program. The PHA can opt to allocate such expenses under a cost allocation system or by a fee-based approach.

 

A PHA, or an instrumentality or affiliate of a PHA, are all bound by the conflict-of-interest provisions set forth in the PHA’s ACC and under HUD regulations promulgated under the Act. HUD’s primary concern is avoiding any actual or perceived personal financial benefit to agents of the PHA, instrumentality, and/or affiliate in connection with public housing funds. PHAs are required to implement policies to identify and prevent any agent of a PHA, instrumentality, or affiliate from receiving a personal financial benefit from a development.

 

The federal procurement rules must be followed whenever public housing funds are expended by a PHA or an instrumentality. There may also be state or local procurement rules, which apply and are not addressed by the Notice.

 

The Notice outlines the applicability of procurement rules in several instances involving PHAs, instrumentalities or affiliates. Since HUD considers an instrumentality to be the same as the PHA, the PHA’s hiring of an instrumentality in a public housing development is not subject to procurement. However, the PHA’s hiring and the instrumentality’s hiring of other development team members (including contractors, consultants, architects, attorneys, etc.) is subject to procurement. On the other hand, a PHA’s hiring of an affiliate to participate in a public housing development is subject to the procurement, but the affiliates’ later hiring of other development team members is not subject to procurement.

 

If the PHA or an instrumentality assumes a general partner or managing member role in an entity (an “Owner Entity”) that owns a development with public housing units, such Owner Entity is also subject to procurement. An Owner Entity, which has an affiliate serving as general partner or managing member, does not need to follow the procurement rules.

 

This somewhat confusing array means, if a PHA or an instrumentality might expend any public housing funds, the federal procurement rules should be considered.

 

PHAs, instrumentalities, and affiliates are all prohibited from disposing, encumbering, guaranteeing or pledging public housing property without HUD consent. Nonpublic housing property is not dependent on HUD consent. Examples of the types of encumbrances prohibited without the prior written approval of HUD include transfers or encumbrances involving public housing property, which include mortgages, pledges of public housing project funds, granting security interests in personal property, providing guaranties backed by public housing property, or grant of a leasehold interest other than dwelling leases with eligible families in the project.

Conclusion and Action Needed
This information is intended to highlight some of the important issues in the Notice but does not represent a legal opinion or advice regarding any particular issue. A copy of the Notice can be obtained by contacting us or by clicking here. We recommend that PHAs review the Notice in detail to become familiar with its requirements, as HUD will require compliance with its contents for all applicable transactions.