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Rehab Costs

An eligible rehabilitation cost is one which may be amortized through the contract rents. In many cases, the amount of rehabilitation that can be amortized under the Moderate Rehabilitation SRO FMR cap is less than the total eligible rehabilitation costs. In these cases, applicants must fund the additional costs with non-debt instruments (e.g., a grant).

Ineligible rehabilitation costs may not be amortized through the contract rents under any circumstances. Applicants must fund ineligible rehabilitation costs with non-debt instruments.

Eligible Rehabilitation Costs

A unit must require a minimum of $3,000 of rehabilitation, including its prorated share of work to be accomplished on common areas or systems, to meet HQS. The $3,000 expenditure per unit includes the cost of materials and labor to perform the required rehabilitation.

All rehabilitation items required to upgrade units to decent, safe, and sanitary condition to comply with HQS must be accounted for before other eligible rehabilitation items may be amortized through the contract rents. Once all HQS-required rehabilitation is accounted for, an applicant may allow other reasonable and necessary rehabilitation costs to be amortized.

Examples of Ineligible Costs

An applicant may not amortize the following rehabilitation costs:

• Luxury items such as swimming pools.
• Contingency fees. An owner may set aside grants or other funds as a contingency reserve. However, this amount may not be amortized through the contract rents. Applicants and owners should note that 24 CFR 882.408(d) does allow for increases in the contract rent to account for unforeseen rehabilitation costs.
• Costs attributable to owner labor (i.e., direct work or supervision of the work).
• Costs associated with the ongoing operation of a project. For instance, an owner might want to employ a security guard, given the location of many SROs. The salary of the guard would be an ongoing expense, and as such, covered by the base rent allowance rather than as a rehabilitation cost.
• Any rehabilitation on units other than SROs or efficiency units.

Note on Reasonableness of Costs

The Department reserves the right to reduce rehabilitation costs which are clearly unreasonable. For instance, rehabilitation debt service for real estate taxes which accrue during construction is an eligible cost. However, an applicant would have to prorate these tax costs when a structure contains unassisted units. In case where there were unassisted units and the applicant amortized the entire tax amount, the Department would reduce this amount.